Rousmaniere: What Does A Model Workers Comp Insurer Do?

I met Phil Kalin, CEO of Pinnacol Assurance, for an hour in his small corner office on the east side of Denver. Through a spacious, northwest facing window, we stood observing the impressive Front Range, running north-south west of the city. He pointed in the direction to Boulder, which evolved from a coal mining town, then a university town, and now part of the state’s own Silicon Valley, a facet of the Denver area’s superior demographic and economic growth. 

We discussed the state workers’ comp fund, for which he has been CEO for six years. He had previously been part of a successful high-tech start-up, a school headmaster, and a hospital executive.   

I have been watching the insurer for some time. It is one of what I call workers’ comp “powerhouses,” those with at least 10% market share and at least $100 million in premiums in a state. Almost all powerhouses (about 20 in number) are monoline state funds or mutual insurers, and most or all of their business is concentrated in one state.

This makes them vulnerable in that they are betting on just one market. Their large presence and origin also make them particularly accountable to their stakeholders to maintain a healthy, economic market for insurance. Pinnacol, with over 50% market share, $600 million in premium, a combined loss ratio in the 80s, and 56,000 policyholders has been making moves that mark it as an insurer to lead the nation’s workers’ comp industry into the future. 

Start with the idea of spreading the fruits of Pinnacol’s involvement in artificial intelligence. The insurer has progressed far enough that, Kalin told me, it has begun to commercialize its investment.  

A wholly owned subsidiary, Cake, brings AI to policy underwriting. It has analyzed a huge database of the Acord form, the standard four pages of data used to start off the underwriting process. An employer’s workforce is typically divided among several or many of the 600-odd class codes. Selecting a single governing code for the purpose of pricing an insurance policy can be a taxing exercise. Cake selects the code. Kalin says that Cake is correct for at least 80% of policies and tells what risks need a conventional review. 

At first, Pinnacol used Cake only for direct writing of very small accounts. Today it makes the service available to insurance brokers. And Pinnacol is sharing the technology with other insurers. 

Brokers need better information technology. A workers’ comp insurer that provides Cake or a similar AI product is not just lowering its own underwriting costs and improving on consistency, but also helping brokers to sustain their business.   

Pinnacol is also applying AI to claims intake. It sees initial triaging of new claims as a crucial step in improving the performance of claims teams and in keeping expenses down. It is using AI’s machine learning to figure out how to send claims for routine handling or for special attention.  

Information technology, it is said, has evolved from hardware-focused, to software-focused, to data-focused. Even with his understated demeanor, Kalin shows a solid confidence in leveraging databases through AI. Over the next decade, any workers’ comp insurer that strives to be up to date will do what Pinnacol is doing now. 

It has been engaging with the state’s economy at a wider scope than most workers’ comp insurers. Pinnacol’s product line is conventional – it writes only workers’ comp insurance. But Pinnacol has defined its role in the state’s economy as broader than selling a business insurance product. It participates in addressing the state’s workforce agenda. 

For instance, it recently surveyed Colorado workers on their attitudes, habits and preferences. It reported on an economic development website that “while 80% think the Colorado economy is growing, 67% think their income isn’t keeping up with the cost of living. Those numbers indicate that economic uncertainty is a stressor for the middle class, not just low-wage earners.” Very few workers’ comp insurers would make such an effort to explore the workforce within its market. 

Pinnacol has turned itself into a kind of laboratory for workforce development. It participates in an employer coalition to hire high school students as apprentices. In its use of AI, it experiences directly the impact of that technology on the workforce. Kalin can talk with business executives about their shared workforce concerns, such as tight job markets and talent development.    

Kalin is comfortable addressing public policy topics such as the gig economy. A workers’ comp insurer with a large market share probably knows more about independent contractor practices than anyone else in a state. 

I wrote a few years ago that Pinnacol had evolved a style of partnership with medical providers which was more highly-developed than that of most claims payers. It has a dedicated provider relations team, which stays in close touch with clinics and doctors. Most workers’ comp insurers have no real provider outreach staffs.  

I sense that what Pinnacol is doing may reflect a fundamental, but easy to overlook, change in the culture of workers’ comp insurance. The top concerns are less and less about risk transfer and more and more about delivery of a complex professional service. I believe that the emerging model of a workers’ comp insurer is that of a service firm which backs up its work with a big, fat warranty. 

Risk transfer, one of the great inventions of the modern world, remains essential. But it is markedly less problematic than it was twenty years ago. Employers are assuming more risk through deductibles. The top crisis 20 to 40 years ago was “weak underwriting discipline.”  That’s no longer the case. The top crisis now is a lapse in servicing the service-oriented customer (be that employer or injured worker). 

Today, service delivery – execution of the insurance policy, loss prevention, claims – demands now the most creative talent in the building.  The appropriate leadership culture is increasingly more aligned with operating, not financial, companies. The adept insurer needs to recruit to the C suite people who are fluent in professional services markets – in fact, from outside insurance. 

Pinnacol has figured out how to be a technology leader and business leader in its market. If you want to see where the more agile workers’ comp insurers are heading, look at Pinnacol now.  

My thanks to Jon Coppelman and Rick Sabetta for assistance on this column.

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