Self-insureds: Changing times translate to changing exposures

The sudden downturn in economic activity stemming from COVID-19 will break new ground for companies in nearly every sector. Indeed, the upheaval in business operations will be unparalleled for many industries. Some risk managers are all too familiar with sharply decreasing or increasing exposure levels. Our clients in the energy sector, for example, are forced to deal with this issue any time there is a significant change in the price of oil. However, changes in operations aren’t something many companies have been forced to handle previously. COVID-19 mandates will require companies with self-insured or high-deductible programs to take a new look at their operations, which may vastly reshape their risk profiles, at least for the time being. The degree to which risk managers can come to new understandings of their changing exposure levels could have significant effects on current and future liability estimates.

Estimating outstanding claim liabilities for a self-insured or large deductible program depends heavily on the exposure levels for the present and recent past. A change in operations alters a company’s risk profile and can have a significant impact on reserving and loss projections for the next quarter or year. The larger the change in operations, the greater the impact on a company’s exposures and claim reserves. In today’s climate, it is extremely important to make sure exposure estimates reflect the latest information available and that any changes in operations have been clearly communicated. Likewise, when life returns to normal, it will be important to frequently monitor the resulting increases in exposure levels.

Estimating the new exposure levels, however, is likely to be a tough call for many risk managers. Some exposures will self-adjust at least to some degree as revenue and payroll decline, but even those measures will likely not capture the full effects of changes to daily life and the workplace.

Workers’ compensation, a pressing issue

Perhaps the greatest unknown for many companies, especially those in retail or food services, is their workers’ compensation exposures, which in most cases are based on a company’s payroll. To some degree, changes in a company’s true exposure to workers’ compensation claims will be reflected in its payroll levels. Layoffs and some furloughs will translate to lower payrolls, which will automatically move to adjust the workers’ compensation exposures.¹ Hours worked will more accurately reflect reduced activity levels, but still will not reflect many of the changes in exposure that are occurring in the workplace.

Many employees are now working from home and, in some cases, companies are continuing to pay workers who are unable to work. Payroll or hours worked might remain relatively level, but the company’s exposure to workers’ compensation claims may have declined markedly. And even for those workers who continue to make their way to the workplace, social distancing measures could alter jobsite dynamics and subsequently affect claim frequency rates.

Many companies have repurposed their workforces, moving food servers into delivery positions and brick-and-mortar sales or service staff into online roles, for example. Their payrolls may not have changed greatly, but employee roles and responsibilities have, and likewise their workers’ compensation exposures. Some manufacturers have revamped production lines to respond to critical need products. Long hours and unfamiliar production processes could increase claim levels even though payroll levels are more or less unchanged.

Hospitals, emergency services, and other related healthcare providers that are treating COVID-19 patients will likely see an increase in claim frequency and severity, although decreased demand for other medical services may mitigate the overall change. That decrease could also affect the ultimate cost of a workers’ compensation claim once it has occurred. The backlog of elective surgeries and other procedures could result in longer return-to-work and claim settlement times, increasing total claim cost in all industries. See the Milliman white paper "How will an interruption in elective medical services affect existing workers' compensation claims?" for further discussion.²

Auto liability, a road less traveled

A company’s changing auto exposures have their own unique challenges.

Miles driven, a common basis for determining a company’s exposure to auto liability claims, will reflect an increase in deliveries that a grocer or restaurant chain might be making, for example, but it would not reflect the inexperience of newly hired drivers or store employees moved into delivery positions. Similarly, miles driven will reflect a decrease in usage but will not reflect the decrease in true exposure that will likely stem from far fewer vehicles on the road, an issue discussed in more detail in the Milliman report "Nowhere to drive: The impact of COVID-19 on the auto insurance industry”.³

Vehicle counts, which may also be used as a measure of a plan’s auto exposure, will likely reflect little, if any, of the true change in exposure levels. Vehicles left idle because of a sharp drop-off in business have virtually no exposure. Conversely, the risk posed by vehicles that are now more heavily used or repurposed for functions other than what the business originally intended will likely climb. Finding a way to adjust the vehicle count based on changes in payroll, revenue, or usage is likely necessary in these instances.

General liability, a flip of the coin

Slip-and-fall claims, one of the primary liability exposures of brick-and-mortar stores and restaurants, will likely diminish as businesses close their doors or transition to only takeout and pickup operations. For many retailers, restaurants, or hospitality operations, their lower general liability exposures will be reflected as drops in revenue, a common measure of general liability exposure, but this decrease in revenue may camouflage the possibility that other claim sources have emerged as the business tries to adapt to this market. Where possible, it may be helpful to examine historical claim costs by function or department in order to adjust revenue to more accurately reflect current activities.

A big question for some organizations that continue to operate as the pandemic spreads is whether they might be held liable for clusterings of cases because of their actions or inactions. The chances may seem slim because of the difficulty in tracking the spread of the virus, but clusters of COVID-19 cases have been linked to some organizations’ activities. How infected people and their families might react is highly speculative and will likely take years to unravel if it does indeed materialize.

This question shouldn’t distract from the much more immediate need to better understand a company’s changing exposures—whether they’re related to workers’ compensation, auto, or general liability. Drastic changes in exposure levels coupled with operational changes will likely have significant effects on the mix of claims and their associated costs. In this climate, it is extremely important to make frequent reassessments of your exposure levels and clearly communicate any changes in operations to your actuary. Not doing so could have material detrimental impacts on a company’s bottom line at a time when few can afford it.

¹Kallfisch, A.C. and Blais, A. (April 13, 2020). What does being furloughed mean, and what is the impact for workers’ compensation exposure? Retrieved on April 13, 2020, from https://us.milliman.com/en/insight/What-does-being-furloughed-mean-and-what-is-the-impact-for-workers-compensation-exposure

²Julga, L.E., Kallfisch, A., & Blais, A. (April 1, 2020). How will an interruption in elective medical services affect existing workers’ compensation claims? Retrieved on April 9, 2020, from https://us.milliman.com/en/insight/how-will-an-interruption-in-elective-medical-services-affect-existing-workers-compensation-claims.

³Anderson, P., Krafcheck, E.P., & Pipkorn, K.A. (March 27, 2020). Nowhere to drive: The impact of COVID-19 on the auto insurance industry. Retrieved on April 9, 2020, from https://us.milliman.com/en/insight/nowhere-to-drive-the-impact-of-covid-19-on-the-auto-insurance-industry.