Workers compensation state of the market: great! (but cross your fingers)

May 22nd, 2007 by Julie Ferguson

NCCI has recently released its its annual State of the Line workers compensation market analysis which is really what all the numbers geeks in our industry wait for with some anticipation. You can read the summary in the press release – NCCI Reiterates “Optimistic but Cautious” Outlook for Workers Compensation Insurance Market – or read the full report (PDF). There’s also a PDF of the PowerPoint and a video version of the presentation if you you’re a true insurance nerd.
Here’s the long and the short of things: the market looks good, better than it has in a number of years. Thirty years, to be exact.
At 96.5%, the combined ratio, which is one of the industry’s primary barometers for assessing market health, is the lowest that it has been in three decades and incredible drop since its 2001 peak of 122%. The combined ratio reflects an insurer’s loss experience plus expenses. In non-jargony terms, the combined ratio essentially reflects how much an insurer pays out for each dollar it takes in. In most business scenarios, the cost of goods or services would tally under 100% with the remainder being the profit margin. Insurance presents an unusual scenario because investment income allows carriers to realize a profit up to about the 110% range, or even higher. So anything under 100 is quite good.
There are other positives, too. The frequency of injuries continues to drop, reserves have been strengthened significantly, and the residual market (or “markets of last resort”) continue to shrink.
But put away the champagne, confetti. and noise makers because there are a few mitigating factors. One is that California’s improved scenario is responsible for about 10 percentage points in those results, so if you take that away, things aren’t quite so rosy. Throw in pallid investment returns, and while still a good year, you essentially have what the actuaries have termed “cautious optimism.” Whee.
See – you can never really relax when you work in a business with actuaries because they are always raining on today’s parade by warning you about the future. Here are a few things that could bedevil us going forward, according to the the experts:

  • Medical costs continue to escalate. The medical portion of the claims dollar is now topping 59%. Fifteen years ago when I got in this business, it was about 48%, with more than half going to wage replacement. That’s a seismic shift, and it doesn’t look like there are any brakes on escalating medical costs in the future.
  • The market may have crested. Workers comp premiums are decreasing and in competitive or buyer’s markets, insurers have historically been their own worst enemies by being too aggressive in discounting price to gain market share. So far so good, but we may be at a point where the rubber meets the road. Joe Paduda has more on the dynamics of pricing and hard and soft markets.
  • The Terrorism Risk Insurance Extension Act – the federal backstop – is scheduled to expire at the end of the year and it’s uncertain if it will be renewed. While some other lines of insurance can exclude coverage or price to include the risk, the regulatory nature of workers comp precludes this, leaving insurers rather exposed.
  • Bad things in other lines could have a spillover impact. Again, I turn to my colleague Joe Paduda for his view of scary things that could affect the property casualty industry performance as a whole.
  • The work force is getting older and fatter. And it isn’t just the older people who are getting fatter, diabetes is reaching what some health care observers have characterized as epidemic. Both these factors – age and weight – increase the risk for new injuries and could add to the severity (read: medical costs) of any injuries that occur.

Here are some other discussions on the work comp numbers:
Joe Paduda – Work Comp Financials
Workers Comp ExecutiveCalifornia Buoys National Workers’ Comp Results
Business InsuranceComp underwriting results improved in 2006: NCCI
Insurance JournalNCCI Reiterates “Optimistic but Cautious” Outlook for Workers Comp