To show just how much I need to get a life, one of the more interesting talks at NCCI las week was a very-well attended general session focused on legislative and regulatory reform. It began with an examination of federal actions beginning with the McCarran Ferguson Act and thru Dodd-Frank, both really important and highly significant legislation that are pretty far outside my area of interest/knowledge/focus.
Things got interesting when we moved into specifics on states. Peter Burton of NCCI noted the fall elections made for a much more Republican slant to most state legislatures and governors’ offices. Jeff Eddinger also spoke, starting off by noting the number of rate increases sought last year about doubled, with NCCI looking for increases in 15 states. Eddinger also reiterated frequency was up nine points last year…
Burton and Eddinger focused on four states – Montana, Illinois,Oklahoma, and North Carolina
The Big Sky State has the highest WC premiums in the nation, a condition that led to an aggressive move by both parties, and by both the legislature and governor, to address costs. The impact of the reforms passed and signed in April is pretty significant – a 22.4% rate decrease. Among the changes from reform, Montana is now an employer direction state, terminated medical benefits after five years (except for permanent claims), and codified usage of the 6th edition of the AMA Guides.
The biggie – Illinois.
IL is known throughout the WC world as a basket case. While Montana’s got troubles, there just isn’t that much business in MT, but there sure is in IL. Caterpillar Tractor has already threatened to leave the state due to work comp, and that, plus the Menard Correctional Center scandal moved comp reform to the top of the list.
As of this week, Gov Quinn has said there looks to be a decent chance that reform will pass despite the partisan battles.
Oklahoma
OK’s WC system is a mess with costs that are the fourth-highest in the nation. The Governor, along with a GOP House and Senate, are likely to get reform completed and signed into law. The bill tightens pharmacy reimbursement, alters the fee schedule, revises IME regulations and makes other changes that together look to reduce premiums significantly.
North Carolina
This is one of the states where government changed dramatically in the GOP landslide of 2009. As a result there is a bill presently under consideration that would, through a variety of specific measures, reduce work comp costs. It is not clear whether this will become law.
There’s a lot more detail available on NCCI’s website on goings-on at other states that wasn’t presented at the conference – you can access it here.

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.

Last week Coventry released their Q1 2011 earnings report, and things are looking good.
First, the workers comp results. Revenues were up slightly, to $191.6 million, a 4% increase over the prior year’s quarter. For the last few months, Coventry’s new CFO Randy Giles has been immersed in the business prior to assuming his new role. Given the inordinate profitability of the comp sector, it’s not surprising Giles was focused on WC; the company is relying on the cash from WC to fund it’s investment in other areas as it prepares for the brave new world of post-reform healthcare in 2014.
Overall, the Louisiana suit is still dragging on Coventry, as it placed “$150.5 million into escrow to fund a preliminary settlement of the Louisiana provider class action charge as disclosed in the Q4 2010.” Note that this is a preliminary settlement reserve; there may – or may not – be an additional allocation when the final settlement is determined. And there’s also the possibility the suit will be overturned at some point.
While Coventry doesn’t report earnings for work comp, word is it remains extraordinarily profitable, driven in part by price increases pushed thru for network business over the last eighteen months or so.
Next week – after NCCI – we’ll look at Coventry’s other results.

After my post yesterday, I received a couple of ‘what are you smoking’ messages from industry colleagues reacting to my note on firming pricing for work comp premiums. (in fairness, I was reporting on a MarketScout study…)
Well, here are a couple other news items that may indicate where pricing is heading.
From Fitch Ratings (via PropertyCasualty360) comes this rather alarming item:
“Workers’ compensation saw the most severe underwriting losses, the report notes, with a combined ratio of 113.3. [emphasis added] “While the workers’ compensation line benefited from reform efforts in various states and continued declines in claims frequency, claims severity in this segment has steadily trended upward,” Fitch notes. The rating agency adds that revenue was hurt by exposure declines as employment levels and payrolls fell during the recession.”
Now that employment and business activity is picking up, I expect we’ll see a bump in frequency as well – not a structural change, but a reaction to faster pace of work, more temps working in unfamiliar jobs, more overtime. This, combined with the tough employment market for the long-term unemployed (can’t go back to work if there aren’t any jobs you are trained for) will likely result in a double whammy – more claims, and more severe claims.
Add to this the recent heavy losses due to catastrophes abroad (Japan) and at home (flooding, tornados) and the financial implications thereof, and it looks like work comp carriers and self insured employers are going to be paying more for reinsurance and stop loss coverage.
In ‘normal’ times a combined ratio of 113 would be tough enough, but with interest rates at near-historic lows and an uncertain investment environment, work comp insurers – and reinsurers – will be hard-pressed to make up the losses with investment income.
What does this mean for you?
A hardening – but not yet hard – market looks increasingly likely this year.

A family matter required my full attention last week, which was why you didn’t see any new posts on Managed Care Matters. A lot happened which we’ll reprise here quickly.
Alex Swedlow of CWCI published another report on the ongoing disaster in California, namely the rampant overuse of narcotics by workers comp claimants. This latest update focused on the use of fentanyl, a narcotic that is between 75 and 100 times more potent than oral morphine.
Fentanyl is NOT indicated for musculo-skeletal injuries, yet it was prescribed for almost 3500 claims out of the total population of sixteen thousand plus claims. Fourteen hundred claims with the diagnosis of ‘medical back problems without spinal cord involvement’ were prescribed fentanyl.
As with the top opioid prescribers, the top ten percent of docs writing scripts for fentanyl wrote the vast majority – in this case 84% of all scripts came from 917 docs, with the average doc writing over fifty scripts for fentanyl.
Actiq and Fentora are orally-administered versions of fentanyl – and are NOT FDA approved for injuries or conditions occurring in workers comp. Nevertheless, Swedlow et al found 77 claimants had scripts for these two wildly expensive drugs.
The ongoing effort to reform work comp in Illinois seems to be moving more sideways than forwards, with competing proposals and bills, intensive lobbying, and a bit of disarray on the business side all contributing to a very, very murky picture.
Meanwhile, there was a bit of good news on the work comp pricing front, as MarketScout reported that they are seeing more favorable pricing trends of late with rates essentially flat in March after pricing firmed in previous months. This mirrors news from the broader property and casualty lines, which, while still pressured by abundant capacity, seem to be showing more resistance to price concessions.
Finally, thanks to Sandy Blunt for the tip – USAToday ran an editorial last week noting 18,000 people a year die from prescription drug abuse. Eighteen thousand.
For the first time in many years, MCM won’t be reporting ‘live’ from the RIMS conference. Too much going on to attend the annual property and casualty confab – work and the west coast location – and the conflict with NCCI’s annual issues symposium later this week make it impracticable to get to Vancouver.
For those going to RIMS, have fun in Vancouver – and make sure to try the sushi – it’s outstanding.