An Environmental Scan for Workers’ Compensation - 2023

Environmental Scanning is a critical exercise for workers’ compensation and other personal injury insurers.  Identifying developments, trends and projections in the operating environment help policy makers prepare for and adapt to the threats and opportunities.  Here is a thumbnail environmental scan to stimulate thinking about the emerging challenges for workers’ compensation (and personal injury insurers) from five perspectives.

Social/Societal Challenges:

Workers’ compensation is a form of social insurance; changes in society from its structure to its norms create challenges.  I’ve noted many societal changes in past blogs but here are four challenges that should be in every scan:

1.        Demographic change.  The structure of our national populations is changing.  The causes are diverse:  refugee population displacements caused by civil conflict, natural disaster, climate change and economic crisis; the decline in the proportion of labour-forced age population in Canada, the US and Australia; and the rise in the number of older workers.  Workers’ compensation organizations (WCOs) can’t alter these impacts but have to adapt to the consequences of these changes: Older workers getting injured, greater co-morbidities, increases in complication and recover times, poor health, limited personal resources, language and culture differences among those new to the jurisdiction, etc. 
2.        Mental Health.  Greater recognition and acceptance of mental health is both a challenge and an opportunity for WCOs.  On the challenge side is finally accepting that mental injuries can arise directly from work or can be exacerbated by work.  Adjusting policies to reflect this recognition is not trivial.  On the policy side, there is wide variation in the standard of proof and onus of proof required to establish a mental injury.   Costs that flow from treatment and compensation can be huge.  The opportunity for prevention, fostering acceptance, building resilience, and supporting return-to-work/ stay-at-work strategies must be developed.  That takes commitments in terms of time and resources outside the typically meager research investments and general prevention awareness campaigns.
3.        The changing nature of work itself.  The Gig economy, remote work, and hybrid employment are among the challenges that change our concept of employment.  Are gig workers employees or contractors? What workplace protections and compensation ought they be entitled to? Where is the workplace for a remote worker (and is their payroll assessable out of jurisdiction)? What rules apply to multi-job holders or extra-national employees?  Are the wages of workers living just across the jurisdictional boundary to be included in payroll estimates?  Are workers in the course of employment when travelling from their home office where they work remotely to the corporate workplace or in-person meeting?  These are not just questions for each jurisdiction to decide; interjurisdictional agreement and consistency may be required to minimize gaps and overlaps in coverage.
4.        Amplification in social media/Rising distrust:  I’ve often said one bad workers’ compensation story (true or not) repeated a hundred times creates as many bad impressions as a hundred individual stories, each reported once.  Social media allows and even rewards negative stories that create outrage and can rapidly erode the social capital of WCOs and personal injury insurers more broadly.  Arguably, this phenomenon is not limited to workers’ compensation.  Trust in government has declined in many jurisdiction [see OECD, “Building Trust to Reinforce Democracy: Key Findings from the 2021 OECD Survey on Drivers of Trust in Public Institutions”,   https://www.oecd.org/governance/trust-in-government/ ],amplification has eroded trust in authorities, politicians, and insurers generally.  Countering this trend isn’t easy particularly because of privacy and confidentiality rules that create an asymmetry between what can be said in social media and released corporately.

Environmental Challenges:

WCOs and occupational safety and health professionals often ignore climate change and its consequences as a risk to their own operations.  Weather extremes such as prolonged winter storms, lengthy heat domes, and persistent atmospheric rivers are becoming more frequent and linked to climate change and are increasing [see .US EPA, “Climate Change Indicators: Weather and Climate”  https://www.epa.gov/climate-indicators/weather-climate for examples]. Often ignored are the follow-on impacts including changes in the distribution and risk of viral and bacterial diseases, changes in intensity and duration of fire seasons, and degradation of air quality.   Some things to focus planning on include:

1.         Hardening infrastructure:  you can’t operate if your systems are vulnerable to environmental issues.  The once in a hundred-year flood, power outages that last a week and heat events that overwhelm data centres can crash all an organization’s ability to serve its customers and protect its resources and reputation.
2.        Preparing workers and employers:  It is fine to say you have to have a plan but few organizations actually prepare for and test plans for events and conditions in this domain.  As the Covid-19 pandemic revealed, acquiring protective gear and educating populations at the last minute is not a plan.
3.           Changes in the frequency and severity of resulting claims:  Just-in-time information does have a place.  Warnings about shade and hydration in advance of a heat event can limit work injuries and disabilities.  Anticipating the changing road conditions in advance of floods or fires is an opportunity to mitigate claims risk. When surges in claim activity occur, the ubiquitous “We are expecting higher than anticipated volume…” will not only further harm the victims but also diminish any reservoir of social capital built through other actions.
4.       New jobs, new risks: Changing sector size:  Environmental change has consequences for the types of businesses requiring workers’ compensation coverage, regulation and prevention initiatives. Wind generation towers off shore, increased solar installations and unique conservation methods involve new jobs and innovative technologies with different risks than the traditional job set.  Regulation of materials and mandated recycling can add to the challenges and change the safety and health risks of existing jobs.  Whole sectors may fade  or expand due to climate change (hard to have a ski season if there is no snow). Impacts are not only on policy holders and those injured but also on the organizations that service them.  Changes to rate groups and risk categories can disrupt funding models.   

 Political/Regulatory Challenges

Workers’ compensation (and other personal injury insurers) are subject to regulation.  The degree of regulation and the extent of its swings is a political matter.  The level of regulation, prescribed coverage mandates, and levels of benefit may all become the subject of political debate or regulatory reform.  Often driven by public sentiment around the need for change, several trends are emerging.

1. Increased cost containment initiatives:  Fee schedules are being mandated and adjusted in several jurisdictions.  Drug formulary introduction and expansion is another emerging trend.  These generally favourable to cost control but can increase friction and monitoring costs, particularly in a time of high medical cost inflation and rapid change in pharmacological science.  Conflicts are likely at the margins, and this can quickly escalate and result in poorer outcomes and degradation of public confidence in the system.
2. Mental health:  The growing acceptance of mental injury as note above is making it into legislation with amendments to health and safety laws, expansion of coverage for PTSD and other mental injuries for certain classes of workers (often, first responders).
3. Presumptions:  Faced with the difficulty of proving causation to the legislative requirement, the use of presumptions is becoming more common.  We see Covid-19 being added to the list of presumptions for workers’ compensation in some jurisdiction for certain front-line workers.  While often rebuttable (or inoperative once community spread exceeds a certain level in the case of Covid-19), the pressure to expand presumptions is evident.  
4. Changes in Eligibility Requirements/ Expansion of coverage:  Generally, the long-term trend to increasing the scope of who is covered in workers’ compensation and what is covered (nature of injury or disease, treatments accepted, reduction or elimination of waiting periods, and level of benefits) have been on the rise.  Even where there is no change, the actions in other jurisdictions are often widely reported and frequently raised for consideration in other jurisdictions.  Monitoring, tracking, and developing positions need to be an expanded part of ongoing corporate planning for WCOs and personal injury insurers.

 

Economic Challenges:

 The Great Financial Crisis, Covid-19, the war in Ukraine… it seems the interconnected economic life of the planet is suffering a new calamity every few years.  For insurers in the work disability space where claim liabilities are incurred then paid out over what can be extended times, these cyclical hits to the economy can upend assumptions.  Reserve policies, asset allocation and growth assumptions may all need revisiting.  Here are some economic perspectives deserving particular attention. 

1.  Medical cost inflation:  According to recent Milliman study (https://www.milliman.com/en/insight/medical-inflation-drivers-and-patterns), medical inflation tends to outpace general inflation over time.  To the extent that medical costs are part of the cost of work and personal injury claims, this pattern can have a big impact on overall claim costs.  The most recent NASI study pegs medical costs at about 47% of workers’ compensation benefit costs based on 2020 claim data.  That’s down from its pea at over 50% in 2014 (see https://www.nasi.org/research/workers-compensation/workers-compensation-benefits-costs-and-coverage/). With aging populations, healthcare professional shortages and increasing drug costs, this perspective deserves attention.
2. Inflation, investment, and interest rate volatility:  WCOs face administration cost increases due to inflation including the upward pressure on wages, facilities and energy.  Not all systems offer cost-of-living protection for beneficiaries but those that do are facing significantly larger increases than the 2%-3% assumptions that may have been in place.   Where such protection is not in place, the political pressure to increase benefits will be significant.  The cost and return assumptions to cover the  “long tail” of claims costs in personal injury claims are highly susceptible to economic assumptions.  Serious and continuous monitoring of assumed inflation costs, discount rates and reserve levels are critical.
3. Policy-holder disruptions:  The book of policy holders remains relatively constant from year to year, at least that was true in the past.  Economic pressures including supply chain issues, inflationary pressure, and labour shortages are causing more business to shutter.  Bankruptcies and insolvency rates are rising.  Other disruptions (including technological innovations) are drastically altering the business landscape.  The resulting shifts can upset risk models and the credibility of rate groups, the basis for rate setting. 
4. Stakeholder financial education:  Insurance financing is a mystery to most people.  Personal injury insurance including workers’ compensation requires complex financial considerations.  Overcoming the “math is hard” mindset is a necessary if difficult task.  Insurers must be transparent about their financial position but have a responsibility to communicate that simply and effectively to wider audiences.  Beyond timely annual financial statements, employers need to understand how their premiums are established and the consequences of their performance.  Unfunded liabilities, unjustified reserve levels or over-funded positions need to be explained and understood if systems are to be sustainable.

 

 

Technological Challenges:

 

WCOs are big users of technology.  Increasingly, automation is taking over the routine claims administration.  Actuarial, finance and statistics roles are all heavily reliant on technology.  The benefits and vulnerabilities of that reliance are changing at an accelerating rate with big implications for WCOs.  Advances in medical technology that may impact the cost of claim, telemedicine can speed access to care, wearable technologies can improve protection for individual workers, and artificial intelligence can assume a greater role in claims processing, freeing resources for more direct care and attention.  On the prevention front, new tech will better protect workers, although the potential for over-reliance on systems and latent errors will undoubtedly occur. Those are all positives to be included in any environmental scan, but there are potential negatives to be considered. 

1. Cybercrime/Security:  Denial of service attacks may have declined but ransomware and data breaches have exploded.  Securing personal data, health records and financial transactions is critical.  Testing and probing exercises have to be stepped up and active monitoring of breaches elsewhere is critical.  What lessons are we learning from the Chubb, Axa and CNA Financial attacks?  
2. Artificial Intelligence:  As these tools emerge and are integrated into claims processes, they will also be used to design new ways to exploit weaknesses in security, claims processes and even appeal processes.  Already Zurich insurance is using an AI robot to process claims in seconds [ See Jacob Maslow,  “How Automation Will Change the Business of Personal Injury”, LegalScoops.com, 21 Feb 2021, https://www.legalscoops.com/how-automation-will-change-the-business-of-personal-injury/ ].  Many aspects of insurance from underwriting, to adjudication, claims management, and even appeals are already benefiting from machine learning. [See Eray Eliaçık,  “The insurance of insurers”, Dataconomy.com, 22 September 2022 https://dataconomy.com/2022/09/artificial-intelligence-in-insurance]. One additional note under this heading.  Public facing AI programs are fledgling and sometimes very inaccurate or misleading on specifics in workers’ compensation law, policy and benefit parameters.  This can contribute to inappropriate conclusions causing some to question decisions or avoid filing claims that would otherwise be advisable. 
3. Quantum computing:  The promise of quantum computing includes security but getting there will take time and a lot of resources.  My fear is that many will put off recognizing this until it is too late. All that security and protective procedures you have in place may become vulnerable soon than later.  A recent SwissRe report identifies this emerging risk with examples that could include internal failures and delays, external direct threats to security and indirect threats such as supplier, partner or infrastructure failures that could arise because of the threat.  [See  Maren Bodenschatz et al, SONAR 2022: New emerging risk insights – 10th anniversary edition, 16 June 2022, https://www.swissre.com/institute/research/sonar/sonar2022.html] 
4. Medical diagnosis and treatment:  Advances here hold great promise.  We will be able to link more cancers to their work or environmental causes; new treatment will emerge to battle the multitude of disease; Immunological and genetic treatments will extend life and health.  For insurers, these will add significant costs, at least initially.  As new treatment modalities arise for physical injury and disability, demand for access to them will accelerate.  Exoskeletons for paraplegia, neuron transplants to reverse paralysis and restore degrees of function, implants that replace organs, regulate body systems, and even enhance functionality will become standard treatment, potentially contributing to increased medical costs. 

Environmental scans are starting points for discussion and consideration.  Your list of examples will likely differ from mine but there will likely be common themes.  It is too easy to put off discussion of issues from these perspectives.   Doing so only increases the potential risks and diminishes potential opportunities to preserve and improve workers’ compensation protections for workers, employers and all of us who benefit from well run systems that are as prepared as they can be for what is coming next.