I’m going to skip over two am speeches – while I could indulge my inner pundit and discourse on Charles Krauthammer’s highly selective use of data in his conservative monologue/analysis of President Obama’s psyche and disuss the insights of Arthur Laffer, he of the widely-discredited “Laffer Curve“, the pm sessions were far more interesting.
I do have to provide just one note re Laffer…
Laffer was not only THE supply-side economist; he was also the guy who in August 2006 famously said: “The United States economy has never been in better shape.” Laffer even bet stock broker and UC Berkeley alumnus [and Ron Paul adviser] Peter Schiff a penny that the economy wouldn’t crash.
Barry Lipton led off the research discussion with a drill-down on changes in frequency. This slideshow could not be started. Try refreshing the page or viewing it in another browser.
Recall that frequency has been on an eighteen (or so) year long steady decline or around 3-5% each year.
In 2009, overall frequency based on wage adjusted payroll declined by 8.4%, with that decline overcome last year as frequency (number of claims) jumping nine percent. (see NCCI for why it’s probably not really nine percent, but more likely around three percent)
Building off yesterday’s
announcement that frequency increased dramatically in 2010, Barry provided background on which types of industry classes (what kinds of jobs in what industries) were seeing what changes in frequency and the relationship of payroll to severity.
Barry was followed by Harry Shuford discussing
older workers and their impact on workers comp. This is rather an important topic as older workers – those over 55, are becoming an increasingly large part of the workforce. Shuford put uo a slide that clearly indicated
claim frequency variation between age groups essentially disappeared over time. That is, there was wide variation in claim frequency (how often workers are hurt) among age groups in 1994, but very little variation in 2009.
This held true when corrected for job mix. Moreover, severity (cost of the claim) was pretty consistent regardless of age group (for workers over 35, while costs were lower for workers under 35). With that said, there was a
rather significant difference in severity when the two groups (above and below 35 years old) were compared, likely caused by the different mix of injuries sustained by the two populations. In fact, about half of the difference in cost was attributed to injury type.
Disability duration was (unsurprisingly) longer for older workers, but a good chunk of the difference was due, again, to the different injury types incurred by the two groups. After considering the various adjustments, medical cost variation was pretty minimal.
The net is most of the impact of baby boomers is “already there”. That is, we likely won’t see much of an uptick in severity due to the aging population in the future.
Frank Schmid had the honor of conducting the final report at the 2011 NCCI Annual Issues Symposium, and he was well worth the wait. Dr Schmid discussed physician fee schedules, price levels, and ‘price departure’.
Schmid reported not results, but “findings” related to a lot of really intriguing issues. To wit
– how do price and quantity change in response to changes in fee schedule?
– what is the rate of inflation in MD services?
– what is the difference between fee schedule and the actual prices paid, known as ‘price departure’.
– do physicians increase or decrease the quantity of services if a fee schedule declines? are these permanent changes? are they symmetric (reversing the fee schedule reverses the response)
Frank and his colleagues looked at the impact of FS changes on physician service categories and total physician services. I won’t get into the methodology – mostly because it’s way too complex for me to understand, much less describe. NCCi examined four states, FL GA MD and UT.
Florida’s fee schedule increased significantly in January of 2004. Interestingly, prices paid increased when the FS went up, but prices, which before had been about 5% less than FS, were about 10% less after the increase. (note this is consistent with internal data HSA has from payer files). This was even more noticeable with prices for physical medicine, where prices went from 7% below FS to about 25% below after reform. A couple years post-reform, prices actually rose.
The opposite occurred in Maryland, with prices paid actually increasing after the fee schedule was changed midway thru 2004.
Schmid broke this down by actual types of service – evaluation and management codes, etc; the discussion of radiology in Florida was particularly interesting, as Schmid noted that “not only do prices respond to fee schedule changes, but fee schedules respond to price changes”.
There’s a lot of very useful, and interesting information here, and much more to come. I applaud NCCI for digging deep into the pricing and fee schedule issue, as my sense is there’s not near enough understanding of the inter-relationship between price and fee schedule. Future plans are to provide actual results across a score or more of states by the end of the year.
This is great stuff.
After this morning’s sobering announcement of a 115 combined ratio for work comp, things didn’t get much more rosy in Bob Hartwig’s presentation on the “post-crisis world”.
Since 2005, work comp net written premiums have dropped from about $50 billion to $35, a drop of about 30%. That’s a massive loss, and that’s why everyone, and every business even remotely connected to the work comp insurance has been hammered over the last few years.
It’s got to get better, right?
right?
For that we turn to Bob Hartwig,who covered everything from Bid Laden to jobs to
Hartwig is always entertaining, enthusiastic, and engaging – hard to do when you’re talking insurance. He started out discussing the Terrorism Risk Insurance Program, and specifically the question “now that Bin Laden is dead, do we still need it?”
Absolutely, says Hartwig, who cited the $40 billion cost of 9/11 and noted that any future disaster would almost by definition result in high claims – and high costs – for workers injured or killed in an attack.
Moving on to the Japanese disaster, total costs are estimated to fall somewhere in the $12 to $45 billion level, with most coming in around $25-30 billion.
With the insured costs of the Japanese catastrophe and domestic, primarily weather-related disasters well up above $40 billion, what’s the implication for work comp insurers? Most of the impact will be on the reinsurance markets, which, while they won’t directly impact comp, certainly will as comp insurers get renewals from their reinsurers. Hartwig noted that the impact – over the near term, will be minimal to nonexistent.
The job front is looking up – as there have been two million new jobs created since January 2011, with significantly stronger growth over the last two months adding almost a half-million jobs in February and March alone. This – of course – is great news for work comp as it adds billions in payroll to what – as we noted earlier today – has been a work comp premium base suffering from lower revenues.
The impact of small business and construction were discussed in detail – listening to Hartwig is somewhat analogous to drinking from the proverbial firehose – but the net is there aren’t enough small businesses starting (as of March 2011), too many went bankrupt over the last two years, and all forms of construction haven’t grown enough – or quickly enough – to add a lot of premium dollars over the near term. When construction and small business start-ups get going, that will be good news indeed for insurers.
Reserve releases have been helping to keep the overall P&C insurance industry combined ratio at a decent level (a bit above 100), but when (not IF) these releases stop, the combined ratio will bump up.
So, what does this all mean?
Hartwig appears to believe the work comp market will remain level, with the positive impact of increasing employment balanced by lots of available capital.
My sense is the impact of rising health care costs will be more significant than most think, and will overcome some of the positive factors noted by Hartwig.
We’ll see.
This morning NCCI released the 2010 results for private work comp insurers – and they aren’t good. The combined ratio climbed to 115%, an increase of a full five points over 2009. The combined ratio is a key measure of industry performance and the deterioration marks continued decline in the health of work comp.
While the number itself is discouraging, one carrier’s decision to add $800 million to reserves was a major contributor.
The economy and employment also added to the poor results, as premium declined by 1.3 points. Premium is based in part on the number of people working thus the recession’s impact on hiring helped drag results down.
As I’ve been predicting for some time, frequency popped up significantly last year. The ‘real’ bump was about three percent, although NCCI is reporting nine with the difference accounted for by “distortions in collected data.”
More to come later today.
