John Burton reports that the workers compensation industry had an excellent year in 2004, delivering an operating ratio of 93.7. According to Burton, the”operating ratio” is the best overall indicator of sector performance as it considers investment income as well as operating results.
The combined ratio (all losses combined plus dividends excluding investment income results) was also strong at 104.9, continuing a four year trend of improvements.
The factors contributing to these returns are expenses, defined as claims, loss adjustment expenses, dividends and underwriting expenses, as well as investment income. It will come as no surprise that investment returns in recent years have been less than stellar; the tepid equity markets and low returns on debt vehicles have combined to make it difficult for investment returns to hit the 20%+ results seen at the end of the last decade.
As noted here previously, the strong financials may not continue for much longer, as there are some indications that the market is softening. The key will be what happens with reinsurance rates and availability. After the hurricane season’s record losses, many reinsurers may be looking to recoup losses by increasing their prices. This will have a rapid and notable trickle-down effect on primary insurance rates.
What does this mean for you?
Manage losses and prevent them where possible. There is little the average employer or insurer can do to impact the reinsurance market, but there is a lot that can be done to mitigate the underlying driver – claims costs. Start with prevention and make sure your managed care program drives lower total claims costs, not just discounts on bills.
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