What is the Role of a Workers Compensation Underwriter?

With technical advances in availability of policy data and risk selection information at an insurance companies beck and call why do we still have underwriters? Can’t a “smart system” or a “predictive model” do a better job picking and pricing a workers compensation risk than a human being? This is a conversation I often have with my closest friend. So in this blog we’ll take a look at the role underwriting plays in todays workers compensation arena.

Workers compensation insurance makes up a significant part of all insurance products placed in our country. For some insurance companies its become the bastard child of their overall book of business. Why? Because for many insurance company execs they look at this line of insurance as a loss leader line of business but still something they must provide to their client base in order to be a player in the overall business insurance market place. Many company folks really don’t understand how workers compensation works or why it’s out there. You may be surprised to know just how few in the overall insurance industry really understand this product let alone its complicated rules, common pitfalls or even their individual roles in placing or securing this valuable insurance product.

The first thing you must understand is that workers compensation insurance is governed law. It’s different from other insurance. You must look to an individual states workers comp statutes for guidance. It’s in statutes where you will find how an individual state defines “employee” and “who must be covered” and “exceptions to the rule” and “exempted employments.” It’s in statutes where you find the “benefits to be provided” and “medical benefits” and “indemnity (lost wages) benefits” and “death benefits” and “rehabilitation benefits.” It’s in statutes where you will find how an employer can meet their workers compensation obligations under the state law by either self-insuring or by securing insurance through a private insurance company, state fund or assigned risk plan.

Lets not forget the possible legal jurisdictions for workers compensation:

  • State workers compensation laws
  • Federal workers compensation laws, Maritime (Admiralty)
    • Federal Employers Liability Act (FELA)
    • Jones Act
    • Federal Employees Compensation Act (FECA)
    • United States Longshore and Harbor Workers Compensation Act (USL&HW)
      • Defense Base Act
      • Outer Continental Shelf Lands Act
      • Nonappropriated Fund Instrumentalities Act

Employers may have exposure to more than one set of legal jurisdictions when it comes to workers compensation obligations and it’s an important part of the underwriters job to understand how these different laws dove tail together. Why? Because Federal workers compensation laws, including Maritime, are treated differently under the workers compensation policy than State laws. The underwriter must first know how state and federal laws affect the policy, secondly be able to identify an employers exposure to these different legal jurisdictions and finally be able to attach required endorsements, identify and use the correct classifications and properly calculate the appropriate premium for the exposure. An underwriter must know whether their company can properly address the Federal exposures or not.

A workers compensation underwriter must pull, from a variety of sources, information about the risk they are underwriting and analyze that information. Information sources may include:

  • The application for coverage – The workers compensation application contains a series of questions aimed at uncovering exposure related to potential loss or employee injury. It also provides a source for classification, pricing and acceptability of the risk.
  • Safety Records – By reviewing OSHA accident logs an underwriter may gain a better understanding of the complexity of the risk. 
  • Inspection Reports – Inspection reports are available from a variety of sources. NCCI inspections may be available for insight into the proper classifications and descriptions of the work place. Audit inspections or safety inspections may be available, again giving another perspective of the physical operation and hazards present and safety precautions used by the employer.
  • Experience Rating Worksheets – The EMR worksheet provides an underwriter with a historical perspective of the risk. It will show previously used classification codes, payroll by code and claims incurred.
  • Loss History – Probably the single most reviewed document will be the loss history. How has this risk performed in the past? Have they been profitable and if claims are present has the employer modified their operations to reduce or eliminate future claims from happening.

A workers compensation underwriters job is to evaluate risk. To make a determination if the risk under evaluation is acceptable and meets their insurance company guidelines for coverage. It’s complicated.

Consider that an underwriter is presented with two potential clients who, as represented on the application for coverage, appear to do the exact same thing. Let’s say both applicants are in the construction business and present themselves on the application as “General Contractors.” Given information presented in this fashion the underwriter has no idea what the client really does. More detail is required and the underwriter orders a site inspection. The site inspection comes back and shows that the first applicant is a residential construction contractor who employs their own work crews, uses no subcontractors and is in the business of building up to 50 homes a year. The site inspection comes back on the second applicant and shows they are a commercial construction firm building skyscraper office buildings in major metropolitan areas, have a significant subcontractor exposure and whose only direct employees are supervisors, engineers and architects. Wow! What a difference between two risks who call themselves “General Contractors.”

For a workers compensation underwriter it’s all about the details.

Technical advances have certainly made the workers compensation underwriters job easier. Many insurance companies invest many dollars into “smart systems” designed by actuaries tasked to identify target areas for acceptability of risk. Smart systems and predictive modeling are now how many insurance companies decide whether a workers compensation risk fits their mold. It’s these systems that decide whether or not they want to take the client on and provide coverage for their operation. Predictive models incorporate many of the mundane risk assessment items that underwriters of the past had to consider on each and every risk presented. For many workers compensation insurance companies it’s now more of a numbers only kind of thing with hands on underwriting taking a backseat to actuarially developed acceptability models.  It’s not about knowing the client but about predicting profit.

Have insurance companies who rely on predictive modeling and smart systems lost their touch for underwriting?  That sounds like a great blog topic for next time!

Hope this helps you out and thanks for reading!