Dennis Mealy, Chief Actuary at NCCI, got into the details with his State of the Line address at NCCI’s annual conference. We’ll focus on workers comp, but it’s important to remember comp is a part of the overall property and casualty industry .
The P&C industry saw a ten point jump in the net combined ratio from 2007 to 2008, with NCCI predicting a 105% 2008 combined ratio.
That’s big news. But as bad as that is, there may well be more bad before things turn around – historically the PC market does not turn around until the combined ratio hits 116%. And, it is still slightly lower than the average ratio over the last 22 years, which was 106.1%. So we may well have more bad news before the sun comes out.
So, how’s comp doing?
Well, as noted in a post earlier today, for the fourth year in a row, work comp premium declined to $39 billion after three consecutive annual declines. From 2005, premiums have dropped almost $8.5 billion – with a big chunk of that decline in California and Florida.
The combined ratio stayed static at 101 after a stellar 93 in 2006. After accounting for investment results, the industry returned a pre-tax operating gain of nine percent in 2008 (predicted) – a solid result to be sure, although a significan drop from 2007 (12%) and 2006 (17%). And, it is still higher than the average return of 6.5% (from 1990 to 2007).
There’s more data that indicates we may still be a ways from the bottom of the soft market. Reserve deficiencies are still relatively low, the accident year loss ratio remains historically low (although my personal opinion is 2008 and 2009 medical costs will come in significantly higher than most industry folks expect. The industry’s predictive accuracy is pretty poor – private carriers projected the AY loss ratio would be 84 in 1999 and 83 in 2000; when the final numbers came in, the rates were 106 and 102 respectively. that’s rather a large miss) See the 2009 SOL report on their website – particularly slides 20 and 22.
Medical costs
Mr Mealy stated that medical costs, while not solved, appear to be moderating. Mealy mentioned that further development (looking back at past predictions after collecting more data) of projected medical costs have indicated medical inflation rates are moderating. He backed up his assertion (perhaps assertion is too strong a term; opinion might be more accurate) by noting that medical costs as a percentage of claims costs look to have dropped from 59% to 58%. Mealy noted this is by no means proof that medical costs are under control, and he does expect medical to reach 60% of costs.
In a follow up discussion with Mr Mealy, we discussed this issue in more detail. The net is although some payers (specifically HSA’s payer clients) are seeing significant increases in medical costs, driven in large part by facility expense, Mr Mealy’s numbers (which include about half of the nation’s workers comp dollars) don’t indicate medical inflation is trending up.
I’m struggling with this, as it goes against I’m seeing. Then again, I tend to work with payers who are working hard to manage medical costs, so my world view may be skewed.
What are you seeing? (Anonymous responses welcomed)
May
7
Investment income (mostly bonds) is way down. Supposedly this will drive a hard market. But I expect that the hard market in WC will come back only if the combined ratio really worsens in 2009 and 2010, and/or if there is a major P & C catastrophe which drains capital from the insurers.Note also that premiums in CA and FL, accounting for perhaps 1/3 of the WC market, are on their way up.