While workers’ comp premiums have been increasing steadily for two years, the industry is still not profitable.
Why not?
There are a bunch of pluses and minuses influencing profitability; premiums were up 7 percent in 2012, driven by higher rates and growing payrolls. Rates have been trending up for eight consecutive quarters and increases are now in the double-digits. That helped improve 2012’s combined to 110.
On the negative side, today’s historically-low interest rates get part of the blame, but their impact is somewhat offset by declining frequency (down 5 percent last year). Fitch’s latest report noted the industry still suffers from reserve deficiencies, making the current combined ratio a bit optimistic.
The industry’s performance is simply a composite of all insurers, and here’s where it gets really interesting. Couple things stand out from Fitch’s analysis (access is free to registrants).
- Companies with weaker underwriting performance shrank their books; specifically, all insurers with combineds over 100 reduced their premiums over the last five years.
- Liberty Mutual is once again at the top of the market-share list, despite dropping from 11.1% share to 9.9%. AIG has reduced its exposure by over $3.5 billion over the last half-decade.
- Fitch notes that the implementation of health reform under PPACA will likely affect “volatility in workers’ compensation claims costs”; that’s certainly true, but I’d suggest the impact of long-term opioid usage will be rather more significant.
- The report authors also note “the industry will continue to report unfavorable reserve development” in work comp over the next several years. In English, they are saying insurers haven’t set aside enough money to pay for the future medical and indemnity expenses of claims that have already occurred.
I remain convinced most insurers don’t have a firm grasp on medical costs and drivers thereof. Fitch’s comments about reserve inadequacy support that belief, as do anecdotal discussions with executives. I detect a distinct uneasiness when discussing medical costs, a sense that things are not as under-control as one would think from reading industry reports and company press releases.
What does this mean for you?
Rates will continue to go up; more employers will go self-insured; and the carriers we expect to be the biggest will likely not be in a few years.
I would add that the save the penny this quarter it’s not that bad yet attitude exasperates the long term exposure. Often when looking at deteriating profitability some companies target the claims floor and fixed claim expenses. Increasing case load on adjusters in the name of efficiency leads to less directed thought per file and an increase in mistakes. Not to mention your favorite topic a tempid or lack of action early where opioids are in play will defiantly hurt you down stream.
I agree that discussions on medical cost containment make executives uneasy. They should take a page from the book of PPACA philosophy. Make physicians accountable for outcomes by paying physicians for results rather than procedures. This will influence physicians to use only appropriate medical treatment and all the proven non-medical, onsite workplace modifications and psychosocial interventions that have proven time and again to reduce medical and disability costs.