While payments for workers compensation indemnity and medical expenses rose just 3.2% in 2003, employer costs were up three times as much. The data, from a report by the National Academy for Social Insurance, indicates claims costs totaled $55 billion while total expenses (claims plus premiums and equivalents) were up to over $80 billion.
This is not surprising. I have been talking for several months about the profitability of the workers compensation market, and NASI’s report clearly indicates that the industry’s recent strong profitability is due to increased pricing. The cognoscenti will also note that this “happy time” appears to be ending, as recent softness in pricing indicates there is more capital flooding into the market as outsiders (and insiders) decide they want some of that profit too. While it looks good now, remember that the industry’s present return on equity is well below that enjoyed by other sectors. Thus, on a relative scale WC is doing well, but on an absolute scale returns are mediocre.
The NASI report is perhaps the best summary of the state of the workers comp business in existence. While it is somewhat dated (due to the time delays in reporting in WC), it is well worth reading.
What does this mean for you?
If you are a seller, don’t cut prices. Period. If you are a buyer, think long and hard before chasing the latest cut-rate workers comp policy. Anyone who would sell that to you is less likely to invest in long-term initiatives that will benefit your program, and over the long term, your bottom line.
Jul
21
