It’s a crazy crazy world out there and workers compensation insurance companies sure have a way of adding to the craziness! I’m just saying that you wouldn’t believe some of the stuff insurance companies do! We’ve recently been flooded with emails and phone calls from employer policyholders from all over the place complaining that their insurance company cancelled their workers compensation policy because they had one claim. What’s up with that? In this blog we’ll talk about the real world, workers compensation claims and why insurance companies cancel or non-renew policies.
Here’s a little reality. If you’ve read many of my blogs you will have figured out by now that insurance companies are about the money! Yep, show me the Money! Wow! What a concept!
I’m not really sure where we all went wrong or where as a collective group of consumers we began to believe that the insurance industry is there to hold our hands and be our friends. Maybe advertising really does work huh? Maybe all of those television advertisements, where the point is to make you feel good about a specific insurance company, have worked. Do you really believe that an insurance company wants to be a part of your family? If so why not invite them to your next family picnic and see who shows up!
The insurance industry is one of the largest financial industries in our country, heck, in the world! In 2013 the United States insurance industry alone collectively generated somewhere around $1 trillion dollars with approximately $481 billion dollars in property and casualty products. That’s the part that includes workers compensation products. There are approximately 6080 insurance companies that, in 2014, employed somewhere around 2.5 million workers with $478 billion dollars in written premium generating about $64 billion in net income after taxes. That’s a lot of money!
So, insurance companies are in business to make money and to generate a profit. Don’t get the wrong idea, these are not bad things! Profit keeps insurance companies in business, keeps all those employees employed and puts money into our economy. For the most part, insurance companies are good corporate partners in our communities and contribute in many ways.
So here’s what you have to remember. Forget those fancy TV commercials, and put on your thinking hats. It is about the money. It’s about profit. That’s real world stuff!
When an employer buys a workers compensation policy they will hopefully have gone through some sort of underwriting process. Maybe it’s only that their business profile meets the insurance company statistical model and their submission for coverage will fly right through the so called underwriting system which will issue a policy to the employer. (Underwriting and modern companies reliance on the development of smart system statistical models to pick acceptable policyholders is a topic we’ll just have to reserve for another blog. Some companies still have real human underwriters! What a surprise!) Once the policy is issued the employer policyholder will not have much in the way of maintenance on the policy. Their main obligation from that point is to make sure they pay their bills on time and to complete the audit process at the end of the policy period.
Most employer policyholders will confuse the terms “cancel” and “non-renew.” Let’s clear up something real quick. There’s a big difference between the terms “cancel” and “non-renew.” The term “cancel,” in insurance jargon, means a sudden ending of the policy. An employer may cancel their policy anytime they wish by simply contacting the insurance company and signing a cancellation request. (A word of caution, when an employer cancels their policy they should be aware that there may be some financial penalties involved such as a short rate factor being applied to the return premium.) An insurance company may only “cancel” a policy for some very specific reasons which may include non-payment of premium, increased hazard and material misrepresentation. Rules of cancellation are governed by each individual state. However, an insurance company may “non-renew” a policy for just about any reason they want! “Non-renewal” means that at the normal renewal date of the policy the insurance company will not continue the policy and that their obligation under the policy terms will end.
Ok, so we know that insurance companies are about the money and that there’s a difference between cancel and non-renew. So where do having claims and having a policy non-renewed fit together?
Remember it’s financial. When an employer’s workers compensation policy premium is low and an employee has suffered a claim, those claim dollars, the amount of the claim, will be held up against the premium dollars that the insurance company will earn over the policy term. For example, when an employer, whose policy premium is $2,000, has an employee that is injured and the claim totals $10,000 in paid and reserves, the insurance company has a very slim opportunity to make a profit on the employers account. In this case it would take the insurance company about 5 years to break even without showing a profit and another 3.5 years to break even with a profit. That’s 8.5 years to make any profit on this employers account!
The question then becomes, when should an insurance company stick with the employer and when should they cut bait and run? What if the employer in the above example had a premium of $6,000? In this cast it would take the insurance company about 1.5 years to break even without profit and 2.75 years with a profit.
Which situation would you risk your money to stay on? That’s what an insurance company must consider.
Given the above examples, how would you react if you were the insurance company and the above mentioned employer has another claim? What if the second claim is only $2,000 in cost? Would that make you secure in your investment? What if the employer has been a policyholder of your for 5 years without a single claim? Would that make a difference to you?
When a claim occurs the single most important thing that happens is that the injured worker is provided with the care they need, healed and returned to work as soon as possible. But how that claim may affect the employers relationship with their insurance company, how that claim may affect the insurance companies perception of their policyholder and what the future of a continued relationship between the two is a dynamic process.
Hope this helps you out and thanks for reading!