It’s been a wild party in the comp world – and a long one too. A brutal hangover may well be next for work comp payers.
Those who remember the late nineties are getting increasingly nervous, as well we should. The longest soft market in my memory is still around, doggedly refusing to firm up – as it should have, long ago. Work comp premium rates continue to decline, especially in key states such as California (down by a whopping two-thirds in five years) and Florida (an equal drop over six years). Most other states have also seen precipitous declines, driven by successful reforms and a decline in frequency.
Yet medical severity – the comp industry’s somewhat-misleading term referring to medical cost – continues to increase in most jurisdictions.
Pause and think about that. Workers comp insurance costs have dropped by two-thirds over five years. Two-thirds. How is that possible? Does that make sense? Is there any way that’s sustainable? Don’t cite statistics and financials and actuarial reports – tell me what your gut tells you.
Mine’s really queasy.
Back in the late nineties, most comp payers thought medical inflation was tamed, as their view in the rear-view mirror indicated medical trend was in the seven to eight percent range. Not so fast, the gods of workers comp proclaimed. Inflation roared in the ensuing years, crushing many payers’ financial returns and bankrupting more than a few carriers in the process.
While NCCI reports medical inflation is under control, that’s not what I’m seeing. Facility costs are trending up, driven by declining ‘savings’ from broad, generalist PPOs. Prescription drug costs are on the increase after four years of declining trend. Ancillary costs are also heading higher, especially for those payers yet to fully embrace specialty managed care programs – and regardless of what you may think, that’s most of the payers in the industry.
Today’s WorkCompCentral reports [subscription required] Liberty Mutual, the nation’s largest writer of work comp with premium of $5.4 billion in 2008, is backing out of California and very nervous about Florida. I have reason to believe the big carrier is not leaving California, but the points made in the article regarding market conditions are spot on. Employers Direct already pulled out of the Golden State, and if it weren’t for new entrants to both Florida and California competing hard for share, the market in both states may well have firmed up by now.
Yet new carriers are entering these markets – which may be either a horrible idea or a pretty smart move. Unburdened by an existing book of comp claims incurred by writing policies that I believe are increasingly underpriced, the smart ones (if there are any) may be able to prosper as the carriers who showed up early for the party are heading towards the floor.
A more likely scenario is these johnny-come-latelies will party hard to catch up, consuming large quantities of business on an empty stomach. Kind of like freshmen at their first college party, with equally unattractive results.
Is it possible that there will be a ‘soft landing’. It is, but it is much, much more likely most carriers will feel like they fell out of a moving cab onto cold, wet, and very hard pavement…
Oct
29
Usually the hard market in workers compensation is triggered by decreased capacity. Carriers pulling out of a market or going under.
We are already seeing carriers start to pull out of some markets. I expect we will see some carriers become insolvent in a couple of years. Their extremely under-priced tail will catch up to them. It will start in California, where the insolvencies always seem to start.