Any club owner who has recently tried to purchase commercial insurance, including workers' comp (WC), knows the problem: Rates have skyrocketed. In simple terms, the commercial insurance industry is in the midst of a “hard market,” meaning that the traditional competition-based price-cutting used by carriers to gain new business no longer exists. Instead, the focus is on raising rates to try to rebuild sagging profits.
Behind the skyrocketing rates are a number of causes, all of which came together at nearly the same time. The first cause is a general “correction” in the market. That is, insurance markets go through hard and soft cycles regardless of other factors. During soft markets, insurers tend to undercut prices for competitive reasons. Then, when a market turns hard, they must not only make up the losses but move into profitable territory. After a sustained soft market of more than 10 years, a correction has been occurring these last three years.
A second cause, and one of the most important, has been the loss of investment returns for insurers. Insurance companies generate revenues from two sources. They bring in underwriting premiums that they hope will cover losses and provide an extra cushion of profit. They also invest the premiums and try to earn an investment profit. In reality, though, most insurance companies operate at a loss in underwriting and try to make it up in investments, allowing them to charge lower rates. However, with losses in the stock market for the last three years, insurers have seen a reduction in investment income, forcing them to shift to an objective underwriting process.
A third cause has been reduced competition. Fewer insurers exist in the industry, which has reduced price competition.
The fourth cause has been a significant increase in losses, particularly those associated with 9/11. Post-9/11 claims on commercial insurers and reinsurance companies could reach as high as $70 billion, the highest for any incident in history, and a tough pill to swallow for the industry that only has about $300 billion in capital worldwide. (Hurricane Andrew, the largest prior single event insurance loss in U.S. history, was only $16 billion.)
A final cause is reduced capacity, caused by more demand for insurance and less capacity available from reinsurers. Since 9/11, the market has contracted significantly, and the reinsurance market, which provides support to the insurance market, is also contracting. In sum, there is a shortage of capacity, and the capacity that does exist costs more. When you have a hard market and decreased capacity, the amount of insurance that can be written decreases. After 9/11, reinsurance capacity dried up for insurers, which drove rates even higher.
Since it is part of the commercial market, the WC market has been experiencing these problems and others. A report published by Weiss Ratings found that insurance companies with at least 50 percent of their business coming from workers' comp experienced an 86 percent decline in profits during the first nine months of 2000. Also during 2000, the failure rate of workers' comp insurers was 12 times higher (7.7%) than the failure rate of all other commercial insurance companies (0.6%).
Besides the challenges facing commercial insurance in general, the WC insurance market has additional challenges unique to its niche. According to a report published by Liberty Mutual Insurance in 2002, medical inflation has been growing at between 8 percent and 20 percent a year since 1996, indemnity (wage replacement) inflation has been growing 7 percent to 10 percent a year, the residual (uninsurable risk) market has increased, and WC-related litigation has been spiraling upward.
Litigation is an area of particular concern. “One reason rates are increasing is a reflection of society, where more and more personal injury attorneys are specializing in WC and becoming more involved in litigation,” says Ken Reinig, president of the Association Insurance Group in Lakewood, CO, which specializes in insurance for the club industry. “More specifically, many of these attorneys are concentrating on the health club industry because they're having success in gaining big awards.”
The WC system was set up so that employers automatically bore financial responsibility for workplace injuries even if an injury wasn't the employer's fault. In return, employees surrendered the right to file suit. In recent years, though, “cracks” have opened in this system, and courts are allowing more WC cases to be heard in court. As a result, for every one dollar collected in premiums by WC insurers, they pay out $1.29, according to a Marsh Inc. report, “2002 Insurance Market Review and Forecast.” For this reason, even though premiums increased an average of 13.5 percent in 2001 and continued to rise in 2002, observers expect to see rates continue to increase.
For WC purposes, workers are classified based on injury or illness risk, and, in most industries, different classifications exist for workers within the same company. For example, a warehouse worker would be classified differently than a machine operator, who would be classified differently than a front office worker.
“It's unfortunate, but in the health club industry, everyone is classified with the same code whether you're a front desk person or a personal trainer,” says Reinig, who predicts that WC rates will continue to increase but not as significantly as in the past.
If you operate a club business in California, you have problems of your own that can't always be addressed by better management. (See the sidebar, “The Craziness of California.”) However, everywhere else, certain strategies can help you begin to reduce your WC premiums.
The first step is to pay attention to the causes of injuries in your club. In some industries, one type of injury will be common but not expensive while another will be infrequent but costly. In the club industry, these tend to be one and the same — back injuries.
“Back injuries are usually the most frequent and the most costly type of injury in health clubs,” says Elaine Barajas, an agent with James G. Parker Insurance Associates in Fresno, CA, which has a number of specialty areas including health clubs. Another common injury is carpal tunnel syndrome, which may not be as expensive as back injuries unless surgery is involved.
“It is easy for club workers to get injured,” says Lin Conrad, executive director of California Clubs of Distinction in El Sobrante, CA. “For example, employees move weights around and train clients on weightlifting, and aerobics instructors can come down on the wrong foot.” Traditionally, though, the department with the most frequent injuries is the maintenance department (the most common injury being to the back) with group exercise coming in second, Conrad says.
Club owners can implement some preventive measures to decrease claims.
- Screen for physical capabilities during the hiring process
“Make sure the applicant is physically qualified to perform the essential functions of the job,” says Reinig.
Barajas agrees, “One way to prevent injuries, especially back injuries, is to do medical screenings before hiring to make sure they are physically capable of performing the jobs.”
However, check with your medical provider and legal counsel to ensure you do so within the guidelines of the Americans With Disabilities Act, which dictates when and how such screenings can be performed.
- Engage in other relevant screening
For example, someone with a criminal record, especially relating to fraud, may pose a greater risk of filing a fraudulent WC claim, cautions Reinig.
- Train and communicate with employees
“If you don't pay attention to how your employees perform their jobs, you will inevitably end up with WC claims,” says Conrad.
Club owners need to be aware of the risks in their clubs to their employees and address these, says Julie Main, general manager of the Santa Barbara Athletic Club in Santa Barbara, CA. “Two keys here are employee training and employee communication. At our club, for example, we have an injury and illness prevention program,” she says. Part of the program involves scheduling regular safety meetings and encouraging employees to raise safety issues during these meetings.
- Take safety seriously
“In our experience, the clubs that have the best WC performance are those that appoint someone on the management team to specifically be a safety director,” says Jon Denley, senior vice president of the Creative Agency Group in Holmdel, NJ, an insurance provider with a specialty in health clubs. This person's responsibility is to think about and address safety issues daily, investigating the facility each day to look for specific safety concerns.
- Consider incentives
For example, offer a small reward to employees each quarter for not having injuries. Such a program can encourage employees to work safely, which can reduce the number of accidents and injuries. “It's amazing how even just a small incentive can have such a big impact on employees,” says Barajas.
- Pay attention
Document information that employees provide voluntarily. “For example, if an employee says he went through a recent surgery for something not work related, document this,” says Reinig. “Then, if that employee ends up filing a WC claim for a related injury, you have this documentation on file.”
If you have an injured employee, you should get that employee back to work as quickly as possible within medical guidelines. Because the employee is working — even if it is a hard-to-find “light-duty” job — you no longer must pay disability for the employee, which then lowers your WC costs.
Besides, research shows that employees who return to work quickly tend to heal faster. In addition, employees who sit home by themselves begin to feel alienated from their employers, making it more likely that they will not return to work at all, or, if they do return, it will be much later than would be medically necessary.
To get an employee back to work, you need to do two things: cooperate and communicate.
Cooperate. “When you have a claim, don't be adversarial,” says Conrad. “Help the employee through the whole process, and stay in touch.” An antagonistic attitude builds resentment in the employee and encourages him or her to seek outside legal counsel.
Communicate. Regardless of how long an employee is out, stay in frequent contact with him or her. Express your concern. “Emphasize that you are looking forward to having the employee return to work,” says Barajas. Again, this approach not only encourages the employee to return to work more quickly but also reduces the chances they will contact a “midnight advertising” attorney who will encourage them to file a suit against you.
“One club owner I know has an extremely successful operation but got into WC problems because he had his maintenance people on payroll, and their WC costs were killing him,” recalls Reinig. “He ended up outsourcing maintenance to get them off the payroll.”
Look for special programs aimed at club owners with excellent safety performance. The Creative Agency Group, for example, offers a Dividend Return Program through the IHRSA Workers' Compensation Safety Group, underwritten by The Hartford. “The lower the loss ratio in the group, the higher the dividend return,” says Denley.
Since 1975, California Clubs of Distinction has offered a WC insurance program through an insurance carrier in the state. It is open to members clubs so they can take advantage of lower rates due to the volume discount.
“About two-thirds of our members are in the program,” reports Conrad. “When we shop for a carrier, we look for good rates, but just as important, we look for great service, including the willingness to work with club owners and train their employees.”
In this way, member clubs can keep the frequency and severity of claims low. As a result, the group has a very low experience rate.
The Craziness of California
Anyone involved in workers' compensation (WC) for any length of time knows the importance of qualifying a discussion of the system by saying something along the lines of, “It's this way in most states, but, of course, we're not talking about California here.” It's been this way since at least the late 1970s, and things have only gotten worse. However, with the election of a business-conscious governor in Arnold Schwarzenegger, there is hope, some say. In addition, since that governor also happens to be a fitness advocate, there is special hope for the club industry.
“California is having a major crisis in WC,” says Elaine Barajas, an agent with James G. Parker Insurance Associates in Fresno, CA. “Costs have skyrocketed dramatically. It has placed a huge burden on club owners, and because of the competition, they can't just raise their dues to cover the costs.”
California clubs have been forced to absorb a increase in premiums over the last four years of between 130 percent and 300 percent, says Lin Conrad, executive director for the California Clubs of Distinction, El Sobrante, CA.
In fact, the situation is so bad in California that insurance companies aren't writing any new business there, says Ken Reinig, president of the Association Insurance Group in Lakewood, CO. The statutory and judicial climates are such that even though rates are four times the national average, insurance companies still can't cover their losses.
“As a result, businesses have to go through the state to purchase their WC insurance, which is a tedious and bureaucratic nightmare,” Reinig says.
Because the club industry is so labor-dependent, clubs experience major financial problems when WC premiums rise, says Julie Main, general manager of the Santa Barbara Athletic Club in Santa Barbara, CA. “In addition, these increases are regardless of experience modification. That is, rates are not determined by how well you run your business,” she says.
Fraud is rampant, too. The system is so out of control in the state that employees know they can “work” it to their own advantage. For example, in California, a convicted criminal who works in a prison can apply for and receive workers' compensation, says Conrad. Another example: In one club, a lightweight basket that covered a sprinkler on the ceiling fell and landed on an employee's thumb, eventually costing the club hundreds of thousands of dollars, Conrad says.
Help On the Way
Recently, Gov. Schwarzenegger has begun to use his “political muscle” to force an overhaul of WC in California. He has said that if the legislature doesn't provide sufficient WC relief through legislation, he will go to the voters with a petition that was developed by a business group called the Committee for Workers' Compensation Reform and Accountability. The group wants to place a referendum on the November ballot, and the governor supports this.
Elements of the plan Schwarzenegger wants include: requiring employees to prove that injuries occurred on the job, replacing court judgments with medical examiner decisions in treatment disputes, requiring employers and employees to agree on selection of treating physicians, and increasing permanent disability benefits for seriously injured employees.
If you're a club owner in California, Conrad has one recommendation: “Become politically active with your state representatives,” she says.