One plaintive plea we often hear from employers is “help me get out of the pool!” If you’re wondering what the heck a pool is and why being in one is viewed as a negative, you aren’t alone. Workers comp is rife with nooks and crannies. Unless you’re an insurance wonk or you suddenly find yourself in one, pools may be of little interest. But for the employers that are assigned to the residual market or “the pool” – some 13% of insureds in the states administered by NCCI in 2004 – it can be an eye-opening experience, particularly since it is an occurrence that is usually marked by a steep increase in costs.
Most employers are insured for workers comp through the voluntary market. In other words, an insurer affirmatively agrees to write the employer’s policy. But there are some organizations that are unable to obtain coverage in the voluntary market. There are many reasons why an employer may be unattractive to insurers: perhaps the company is in a high-risk industry, such as roofing; perhaps the company has a poor loss experience, with a history of frequent or expensive claims; or perhaps it’s just because a company is too new or too small to be a good risk.
Because workers comp is a mandatory coverage (for almost all employers in almost every state), some type of market of last resort or “residual market” mechanism must exist to ensure coverage for any employers that aren’t able to secure coverage in the open market. The way the residual market is handled can vary from state to state. Some states administer assigned risk pools; in other cases, NCCI administers these pools. Christine Fuge offers a good overview of the different mechanisms in her article Navigating the Workers Compensation Residual Market. (While some details may have changed since 2002 when the article first appeared, the concepts remain largely unchanged.)
Market conditions are a factor
The pool population ebbs and flows with general market conditions. In any given state, when a market is healthy and rates adequate, insurers flock to the state to write business. This creates a competitive environment for employers and the pool is generally at its lowest ebb. When market conditions are troubled due to inadequate rates, scarce reinsurance, or other factors, insurers tighten up their underwriting criteria and become more selective. Availability constricts and the pool fills up.
If the pool gets large enough, the market can be dangerously destabilized. This was the case in Massachusetts in the late 1980s when the residual market burgeoned to $800 million, more than 65% of the entire premium in the Commonwealth, and more than 80% of all employers. Our CEO, Tom Lynch, was instrumental in crafting an innovative credit program, the Qualified Loss Management Program (QLMP), designed to de-populate the pool by offering a credit to employers who learned to control losses. Through the QLMP, thousands of employers improved their loss experience and were able to exit the pool.
All pay, no play
When a buyer is in a competitive market, there is some leverage in terms of price and service. Employers in the residual market enjoy no such advantages. There is one certainty, however – coverage will be costly. Employers that find themselves in the pool may be:
- subject to costly surcharges and significantly higher rates
- ineligible for premium discounts or scheduled credits
- limited in terms of available services
- facing little or no choice in insurer
Are you a good risk? Getting out of the pool
If you are in the pool and you want to get out, there are no shortcuts – it all comes down to controlling losses. And because all losses are pooled, there may be little in the way of incentives or disincentives for your insurer to help in controlling losses, so it’s all up to you. First and foremost, prevent any injuries from occurring; but if injuries do occur, ensure that you have a caring, responsive management system in place to help your employees recover and return to work. Provide excellent, high quality medical care. Communicate with employees frequently throughout the recovery process. Let employees know their rights and responsibilities. Be fair and consistent. Provide early return to work programs.
For more information, see Jon Coppleman’s article entitled Are You a Good Risk? (PDF). NCCI also offers some excellent articles about the rights and responsibilites of a residual market policyholder, along with an array of resources for residual market employers, brokers and insurers. It is also important to check your individual state’s workers compensation authority for state-specific regulations.