Rousmaniere: Sedgwick’s Secret Sauce

17 Jul, 2019 Peter Rousmaniere


Sedgwick is the most successful business in the workers’ compensation industry, when evaluated from reported or estimated information about growth of business volume, number of employees, and investor transactions. While others stumble, it marches ahead. What is its secret sauce?

Its secret sauce is really not a secret. It is the firm’s superior ability to find, gain control over, and monetize the phenomenal long-term growth in the revenues generated for managing the payment of indemnity and medical benefits.

Good claims handling, skill at customizing to the client’s needs and competitive pricing of core adjusting, result in an attractive proposition to customers. That accounts for its growth. Its profits are due to masterful packaging of claims services.

Publicly available data show that in the past 25 years, the number of lost time compensable injuries has declined by about half, due mainly to improved worksite safety and employer skills at keeping newly injured worker employed. That’s a gain to workers and employers. While this impressive accomplishment unfolded, the costs of managing claims grew by an even more impressive 350%.

In 1992, about $5 billion were expended for claims overhead – which is called either “allocated loss adjustment expense” or “unallocated loss adjustment expense.” Combined, they are “loss adjustment expense” or LAE, now about $17 billion. In 1992 they amounted to about 13% of the total spent on indemnity and medical benefits. By 2018, that has risen to 30%.

In recent years, total benefits have flattened or even gone down. Why not, given the relentless decline in lost time claims (about 4% a year) and the great moderation in medical price inflation?

That has not been the case with LAE. The National Council on Compensation Insurance reports that LAE has recently risen from 26% of losses to 30%.

In California, just between 2014 and 2019, LAE rose from 28% to 36% of benefits incurred, even as total incurred benefits sharply declined.

The expenses of paying benefits are sticky. A company in a position to control all service streams, and skillful in setting charges for these expenses, can do very well even as the total economic footprint of work injuries in the American economy declines.

Peeling the onion, here is what has been going on since the early 1990s. The story is in three chapters.

First, claims management has become more complicated through the emergence of mandated and voluntary (privately initiated) services. Case management. Medical provider networks. Bill review. Utilization review. Pharmacy benefit managers. Medicare set-asides. These services on balance reduce claims costs.

The second chapter is how the claims payer can profit by being the middleman for delivering these cost containment services. Most vendors of the services in workers’ comp sell a product, such as bill review. Third party administers, however, package these products.

They design or agree to contracts which include incentives and revenue share agreements that capture revenue streams for them. They can also select to make, rather than buy, these services if they find they profit more.

They can allow for inflated prices for services, and receive ever higher profit shares. A good example of pharmacy benefit management agreement, which are conventionally over-priced by around 30%. Another example is how Medicare set-aside services are generally over bought.  The customer is primarily focused on the price TPAs set for basic claims services, such as a fixed charge for each claim, and not the total cost.

The third chapter is yet to be written: what happens when benefits decline further, in line with how work injury risk continues to improve?  One possible scenario, which I believe is at the core of Sedgwick’s market strategy, is to take over ever more claims handling from insurers. Third party administrators have it in their DNA to execute well a myriad of services. They thereby can make an attractive offer to take over the insurer’s claims handling on a private label basis. This allows the insurer, faced with the headwinds of a stagnant market, to focus on the complex task of marketing policies.

I believe this to be Sedgwick’s most important strategic target. If the total demand for services is mature or declining, acquire the claims operation of insurers, which account for 70% of the claims business.

The mandates pretty much set a floor on LAE costs, though the level of the floor is undeterminable. The chance of a state removing a mandate is vanishingly small. And there is always a plausible argument for a new or nuanced service.

Employers and their representatives may be satisfied with the decline in workers’ comp premiums. The Oregon biannual study shows that between 2010 and 2018 the median state experienced a decline of 17% in premiums. Since than more states are seeing drops of over 10% in one year. They focus on this good news.

And Sedgwick has a sound future in a mature market.


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    About The Author

    • Peter Rousmaniere

      Peter Rousmaniere is widely known throughout the workers’ compensation industry, both for his writing and consulting experience. Based in the picture perfect New England town of Woodstock, VT, he is a regular on the conference circuit, and is deeply in tune with trends and developments within the industry. His passion is writing and presenting on issues largely related to immigration, and he maintains a blog on the subject at

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