How Is Work Comp Doing? The Details...
Friday, May 8, 2009 | 0
By Joe Paduda
Dennis Mealy, chief actuary for the National Council on Compensation Insurance, got into the details with his State of the Line address at NCCI's annual conference in Orlando, Fla. We'll focus on workers' comp, but it's important to remember comp is a part of the overall property and casualty (P&C) industry .
The P&C industry saw a 10-point jump in the net combined ratio from 2007 to 2008, with NCCI predicting a 105% combined ratio for 2008.
That's big news. But as bad as that is, there may well be more bad before things turn around - historically the PC market does not turn around until the combined ratio hits 116%. And, it is still slightly lower than the average ratio over the last 22 years, which was 106.1%. So we may well have more bad news before the sun comes out.
So, how's comp doing?
Well, as noted in a post earlier today, for the fourth year in a row, work comp premium declined to $39 billion after three consecutive annual declines. From 2005, premiums have dropped almost $8.5 billion - with a big chunk of that decline in California and Florida.
The combined ratio stayed static at 101 after a stellar 93 in 2006. After accounting for investment results, the industry returned a pre-tax operating gain of nine percent in 2008 (predicted) - a solid result to be sure, although a significant drop from 2007 (12%) and 2006 (17%). And, it is still higher than the average return of 6.5% (from 1990 to 2007).
There's more data that indicates we may still be a ways from the bottom of the soft market. Reserve deficiencies are still relatively low, the accident year loss ratio remains historically low (although my personal opinion is 2008 and 2009 medical costs will come in significantly higher than most industry folks expect. The industry's predictive accuracy is pretty poor - private carriers projected the AY loss ratio would be 84 in 1999 and 83 in 2000; when the final numbers came in, the rates were 106 and 102 respectively. that's rather a large miss) See the 2009 SOL report on their website - particularly slides 20 and 22.
Medical costs
Mr Mealy stated that medical costs, while not solved, appear to be moderating. Mealy mentioned that further development (looking back at past predictions after collecting more data) of projected medical costs have indicated medical inflation rates are moderating. He backed up his assertion (perhaps "assertion" is too strong a term; "opinion" might be more accurate) by noting that medical costs as a percentage of claims costs look to have dropped from 59% to 58%. Mealy noted this is by no means proof that medical costs are under control, and he does expect medical to reach 60% of costs.
In a follow-up discussion with Mr Mealy, we discussed this issue in more detail. The net is although some payers (specifically HSA's payer clients) are seeing significant increases in medical costs, driven in large part by facility expense, Mr Mealy's numbers (which include about half of the nation's workers' comp dollars) don't indicate medical inflation is trending up.
I'm struggling with this, as it goes against what I'm seeing. Then again, I tend to work with payers who are working hard to manage medical costs, so my world view may be skewed.
What are you seeing?
National Council on Compensation Insurance President Steve Klingel led off the NCCI Annual Issues Symposium (AIS) with a discussion of reform.
Regulation
Notably, despite the sweeping wins by Democrats at the state level, the actual number of reform bills likely to become law decreased.
From the Federal perspective, one of the more significant potential issues is the advocacy by California Rep. Joe Baca (D-Rialto) of a National Commission on Workers' Compensation to evaluate state WC laws and regulations to determine the equity and fairness of the states' comp systems. There's not much support on the Hill for Baca's initiative - but given the pace and variety of issues under consideration in D.C. it is possible - if only slightly - that the bill gets some attention (it also doesn't cost anything, which is kind of rare these days).
The overall message? We are very much in a wait-and-see mode regarding changes in regulation, oversight, and potential impact of reform and Medicare changes.
Recession
Payroll (which has a dramatic impact on work comp premiums) looks to be somewhat flat; if unemployment hits double digits, expect payroll to decline for the first time in decades. Watch this closely.
If employers continue to cut wages across the board, premium will decrease - but the underlying risks, and the cost of those risks, will not. There appears to be anecdotal evidence of these across-the-board wage cuts; insurers would do well to monitor this carefully.
The decline in frequency is logical during a recession - in fact in six out of seven recessions frequency declined (Note: I've posted on this several times in the past). However , this recession is deeper, broader, and nastier than almost any others on record, and therefore it's harder to predict what the impact will be. There's no doubt - in my mind - that the recession has prolonged an already-too-long soft market. Despite rising medical costs and increases in overall lost time claim costs, comp premium rates remain historically low.
As some economist long ago said: "If something can't go on forever, it won't."
The obvious question is the timing of 'forever'. For many comp writers, 'forever' may come too late. Their ongoing decisions to write comp at low rates despite upward pressure from medical expense may well result in a shake-out similar to the one we old folks saw after the end of the soft market of the late '90s.
There will be much more detail on these issues in later sessions - stay tuned.
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Joseph Paduda's blog, managedcarematters.com, focuses on managed care for group health, workers compensation, auto insurance, cost containment, health policy, health research, and medical news for insurers, employers, and health care providers. Paduda is the principal of Health Strategy Associates.
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