The property and casualty insurance industry is looking at increasing underwriting losses in 2022...while workers’ comp (which represents perhaps 1/10 of total P&C premiums) continues to be hugely profitable.

Which begs the question..will multi-line insurers try to use work comp to offset lower profits in other lines?

According to the Insurance Information Institute;

The (P&C) industry’s combined ratio — a measure of underwriting profitability in which a number below 100 represents a profit and one above 100 represents a loss – is forecast to be 105.6, a worsening of 6.1 points from 99.5 in 2021. [emphasis added]

Amidst troubling trends from other P&C lines – personal and commercial auto, property, multi-peril and homeowners, workers comp stands out…this from Milliman’s Jason Kurtz:

“The workers compensation line continues to stand alone, with its multi-year run of strong underwriting profitability forecast to continue for 2022 and into 2023-2024.”

Premium rates are increasing for pretty much every P&C insurance sector – except workers’ comp – where rates in almost all states are headed in the other direction.

Actuaries at III and Millman project an overall P&C combined ratio of 105.6 for 2022 – while work comp’s looking a combined of 87.2…almost 20 points better (yeah I know those are different years, but not that different).

courtesy NCCI

What does this mean for you?

While multi-line insurers may try to jack up work comp rates to offset losses in other lines, the soft work comp market makes it extremely unlikely that will work…employers will find plenty of carriers very willing to write their business.

Stick with me here…it will be worth it.

Yesterday’s post about private equity’s investments in worker’s comp services generated a flurry of private emails and a few comments – most echoing the “service is king” mantra.

Today’s news that Twitter is near collapse adds depth to the service discussion – and the ultimate cost of hubris.

Elon Musk is both one of the most transformational leaders and one of the biggest (insert anatomical reference here) of the last century. He is in large part responsible for shifting personal transportation away from fossil-fuel driven cars, an incredibly difficult and critically important transition.

If your boss shows up wearing this, call your favorite recruiter.

He also has a severe case form of “Michael Jordan Syndrome” or MJS. Jordan was a transformational basketball player, perhaps the greatest ever. His skills, ability, drive and impact on the game are unparalleled.

Then he tried baseball, because, you know, if you’re great, you’re…great.

Well, no…Jordan was not good at baseball. He had a hole in his swing you could drive a bus through, made a ton of mistakes on the base paths and in the outfield, and generally was a not very good minor league player.

After a couple seasons sitting in a bus driving around the South playing in front of a few hundred fans every night, Jordan recognized that being awesomely great at one thing did not mean you would be great at other things.

Musk’s amazingly stupid, shortsighted, arrogant and destructive decisions in the very few days he’s owned Twitter have been breathtakingly bad and may well cost him his entire $44 billion investment. And has helped tank Tesla stock in the process; Tesla has lost $700 billion in value in less than a year.

Besides electrifying transportation, bringing reliable internet to remote areas, and launching rockets into space, Musk can lay claim to another singular achievement – Never in the course of humanity has so much “value” been destroyed so quickly. So he’s got that going for him.

His catastrophically bad leadership of a social media giant also makes Jordan’s aborted foray into professional baseball look like an overwhelming success – and Musk like the best example ever of Michael Jordan Syndrome (also known as hubris).

Rather than walk through all of Musk’s more notably destructive decisions, all of which I am quite sure made perfect sense to him at the time, because similar decisions “worked” at Tesla, let’s just focus on one – treating people like &^%$(@#$.

Musk seemed to think he could force Twitter employees to work like galley slaves while insulting them.
Hundreds have given Musk the single-finger salute, leading to major service issues.

This from MSN.com:
“I know of six critical systems (like ‘serving tweets’ levels of critical) which no longer have any engineers,” a former employee said. “There is no longer even a skeleton crew manning the system. It will continue to coast until it runs into something, and then it will stop.”

Musk slashed staff, trying to force them to return to the office within 12 hours (helloooo…parents of small kids!!), and demanding obscenely brutal work schedules, all to create bigger profits.

Instead, he’s on the verge of turning $44 billion into a gigantic mountain of ash.

There’s a clear lesson here – employees create “value” – management doesn’t.

Employees do this by showing up every day committed to doing good work, by using their brains and muscle to produce goods and services, by thinking hard about how to do things better, faster, and more effectively.

Beating them over the head, firing half of them, and telling survivors you don’t give a rat’s rear end about them is monumentally dumb.

Of course, Musk’s arrogant stupidity represents the worst-case of employee under-valuing. BUT, just because PE firms don’t push things this far does NOT mean many aren’t making the same mistakes, mistakes that will take longer to play out in the form of unhappy customers, lower revenues, and lost business.

But play out they have – and will.

What does this mean for you?

Execs serve management.

Management serves the workers.

Workers are the ones that actually serve customers. 

After 15 years working with private equity firms looking to invest in workers’ comp service companies, I’ve learned a couple of things.

• Work comp is attractive primarily because it is viewed (accurately) as horribly inefficient, with admin expenses that are many multiples of those in group health, medicare, medicaid, and Exchange healthplans. PE firms LOVE inefficient industries…think old-school logistics replaced by just-in-time supply chain management; small physician practices snapped up by ever-growing health systems; and now rental housing.
  BUT…work comp is inherently inefficient because:
  • when you’ve seen one state you’ve seen one state. If you want to be a big player, you need coverage in South Dakota and Vermont as well as New York and California. So, you have to comply with constantly evolving regulations, reporting requirements, reimbursement standards, certifications and licensing.
  • each large employer has its own list of wants needs and must haves, which make “standardization” inherently impossible.
  • it is a shrinking industry, which means an investment today has to be evaluated against the reality that one out of twelve claims will not exist in three years.
• High-touch service is absolutely mandatory. This flies in the face of “improving efficiency”… you can’t have people on the phone if you want to cut admin expenses. What many (but not all) PE execs don’t understand is adjusters and case managers and risk managers and injured workers and providers need quick accurate answers.
  Think calling your health plan, cellular carrier, tech service and on and on…an immensely frustrating experience certain to make you cranky for the rest of the day.
  Enough  adjusters complaining about endless automated responses (in order to best serve you I’ll have to ask a few questions, click one if you are in Pennsylvania, two if you’re in New York…cue cell phone being thrown at the wall) will get the managed care execs’ attention, and its off to RFP!
• Firms that push their companies to create “value” defined as more revenue will ultimately destroy the value of the company.
  PE execs (again not all) define “value” purely in financial terms – how much EBITDA/free cash flow does a company generate – because the more earnings, the higher the price.
  This is nonsense. 
  “Value” is ultimately determined by your customers. Sure the quarterly numbers will look rosy for a quarter or two, but all those cost reductions, layoffs, and other “efficiency” measures will bite you in the butt when customers leave.
• Decisions to sell/not sell companies are often driven by PE execs’ personal financial and “reputational” concerns and not by what’s smart and best for PE investors.
  Think Apax’ investment in One Call; after a couple of years pretty much everyone in the industry knew it wasn’t going to be a success, yet One Call’s board refused to recognize the obvious anti…to no one’s surprise, they had to write down their entire $700 million investment.
  Individual PE execs with decision power don’t want to admit their mistakes – or don’t want to sell for less than X times what they paid for the company. In the latter case, PE execs typically don’t get a big bonus – or any bonus at all – unless the company sells for 2.5 or more times what they paid.
  Meanwhile company execs and staff with stock options – who would get a nice payday if the company sells for less than that 2.5 number – get frustrated/angry/demotivated with obvious impact on their enthusiasm and work quality.

What does this mean for you?

Understanding what really creates “value” is critical – happy customers and happy staff. If you’re buying or own a company, focus on those two things and not on some BS number.