Improving Profitability

Friday, February 3, 2012 | 0

California workers' comp insurer profitability has improved?

That's not a headline we'd expect to see, particularly given the conventional wisdom that loss ratios of California workers' comp carriers have deteriorated. The conventional wisdom is that comp carriers have seen declines in investment income and in premium volume while costs were rising.

So it was with some surprise that I see the Jan. 31 bulletin from the California Workers' Compensation Institute. The numbers do the talking, so I'll present the results without a lot of editorializing in this post.

According to the press release:

"After declining for four years in a row, California workers' compensation insurers' return on net worth showed signs of improvement in 2010 according to new National Association of Insurance Commissioners (NAIC) data, which pegs the California insurers' 2010 return on net worth at 5.2% vs. 4.6% in 2009, moving the state's ranking from 25th to a tie for 18th out of 46 states that operate without a monopolistic state fund."

The CWCI bulletin noted that the NAIC compiles an annual report on profitability of all lines of insurance by state and by type of insurance.

According to CWCI, because the NAIC report "is the only source of complete, direct income statement data for al lines of insurance for every state, and it is produced by an objective source, the report is a useful tool for tracking the performance and profitability of different lines of insurance over time."

In 2010, California workers' comp was said to generate a 5.2% return on net worth vs 3.9% for all United States workers' comp. By comparison, all California lines of insurance generated 9.7% returns. Property and casualty lines of insurance generated 6% returns in 2010, only slightly higher than the California workers' comp returns.

So comp isn't the most lucrative type of insurance in California, but the results here were better in 2010 than the national average.

The 2010 Fortune rate of return for all industries was 12.7%.

The CWCI bulletin notes that:

"As an industry, California workers' compensation insurers met or exceeded the 12% standard from 2004-2007, but the market has been on a roller coaster ride since the late 1990s, and those double-digit returns in the middle of the decade followed four straight years of losses that ended when they finally moved into the black in 2003. After the 2006 peak, California insurers' returns began to trend down, dropping to a 6-year low of 4.6% in 2009, so even though the 5.2% return for 2010 was slightly below the 10 year average, it did mark the first year-over-year improvement in the rate of return in four years. Although California workers' compensation insurers' average return on net worth for 2010 was less than the returns for all lines of insurance in California and the U.S., as well as the returns for property and casualty insurers and the Fortune's Industrial and Service Sectors, it was better than the 3.9% average earned by workers' compensation insurers nationwide."

The years after the Schwarzenegger 2004 reforms were fat for the industry.

From a negative 11.5% return on net worth in 2002, returns climbed to 12.6% in 2004, 14.2% in 2005, 16.4% in 2006, and 12.1% in 2007 before settling down to lower levels.

But despite all of the California system's problems, profitability of insurers appears to have stabilized.

These results come at a time when we've learned that injured workers experienced a 58% decline in permanent disability payouts.

It's all part of the puzzle we call workers' comp, as various stakeholders envision how possible changes in the system might fit together to create a different picture.