NCCI suggests a “precarious outlook prevails” for the workers comp market

April 18th, 2011 by Julie Ferguson

The NCCI Annual Issues Report is out and it is available as an online flipbook, you can download each article in PDF, or you can request a hard copy.
Most who work in the industry realize the significance of these reports but for employers, a brief side note is in order. NCCI stands for the National Council on Compensation Insurance, Inc., a rating and data collection bureau specializing in workers’ compensation. because NCCI manages the nation’s largest database of workers compensation insurance information, it is in authoritative position to analyze industry trends and upcoming legislation, to offer insurance rate recommendations, and to provide a variety of services and tools to a variety of constituencies, including state insurance bureaus, insurers, insureds, the media and others with an interest in workers comp.
The Issues Report provides an industry snapshot of where we’ve been, along with some trending and analysis that point to where we are likely heading. While all the articles have merit, for industry financial trending we point you to these three cornerstone documents:

While the property casualty market is generally positive and has performed better than most other sectors during the economic downturn, the same cannot be said for the segment of the market that is workers compensation.
The workers compensation combined ratio continues in an upward direction. This is never good. The combined ratio is a barometer of an insurer’s profitability. It indicates how much an insurer pays out for each dollar it takes in (incurred losses + expenses ÷ earned premium). For most businesses, it’s a problem if you pay out more than you have coming in, but for insurers, investment income on reserves (money held for claims costs) is also a significant component in overall profitability. So an insurer can still realize a profit even if it pays out more in losses than it takes in when investment income is factored in.
Hartwig says that in 2010, the combined ratio is approaching 115. To put this in some historical perspective, the combined ratio at the peak of the crisis in 2001 was 122% percent, and the historic low in recent years was 93% in 2005. In 2009, we saw about 110%, the the worst combined ratio since 2003.
Other significant issues:

  • Investment gains associated with workers compensation have seen some improvements, but are still on the low side.
  • Workers comp written premium eroded significantly as jobs were shed, and although the employment situation is leveling off, it is hardly booming. It’s expected that employment may be fairly flat through 2011.
  • Medical inflation has slowed but medical costs are still on the increase.
  • Uncertainty abounds: about the economy, about the direction of healthcare, about bank & housing market, about financial reform. Plus, there is a broader regulatory environment with OSHA and DOL, and there is policy uncertainty given the volatile political environment.

The pressure is on and the challenge for insurers is clear: the only way to make money under current conditions is through rigorous underwriting and tight expense control. Employers with marginal records may have limited options come renewal time. It’s always a good idea for employers to control losses, but never as important as in a tight underwriting climate.
Hartwig offers some positives about the employment scenario:

” Last year’s stubbornly high unemployment gives the misimpression that no progress has been made in reducing joblessness. In reality, as shown in Exhibit 2, private sector jobs were created every month in 2010, for a total of 1.3 million net new jobs. While job creation so far is at a pace too slow to bring down the overall jobless rate, it remains an extraordinary reversal from the hemorrhaging of jobs and associated payrolls in the two prior years. At the height of the crisis in early 2009, private employers were shedding more than 700,000 jobs per month. Private employers eliminated a staggering 4.7 million jobs in 2009 and 3.8 million in 2007. The unemployment rate remains high today in part because workers, sensing improving labor market conditions, are streaming back into the labor force.”

And on payrolls, the basis for premium:

“… The latest data indicates that aggregate wage and salary disbursements have recouped about half of what was lost during the recession. It is quite likely that those losses will be fully recouped by the second half of 2011.”

He also offers some perspective on other factors beyond payroll that are eroding written premium:

“The economy will clearly exert a major influence on workers compensation insurers’ growth opportunities in 2011 and beyond.Exhibit 3 suggests that other factors are playing an important, if not dominant, role when it comes to explaining the precipitous 29% drop in premium written over the past several years. Workers compensation premium began to fall in early 2006, long before the start of the Great Recession in December 2007. Aggressive pricing, along with the increased popularity of large deductible programs, captives, and self-insurance alternatives have all taken their toll, as have a surge in return premium. The loss of exposure due to the economy was actually one of the more recent contributors to the fall. On net, pricing is likely responsible for about half the decline.”

All in all, the NCCI reports reflect negatives that many of us have been seeing or living through, and while the patient is still in guarded condition, there are reasons for cautious optimism.
And don’t skip the other articles in the Issues Report just because we did not address them here – there is always good information in these reports!

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