Insight, analysis & opinion from Joe Paduda

May
16

Workers’ comp – the state of the line, aka Dennis Mealy’s farewell tour

Dennis Mealy – NCCI’s chief actuary (and soon to be retired chief actuary) got further into the details of the data.  Lots to get into; here are my takeaways.

Work comp premiums written by private carriers jumped significantly, up 9 percent over 2011 to $35.2 billion, by far the greatest increase in the P&C industry.  State funds accounted for another $4.4 billion in premiums; recall there’s been a trend towards more self-insurance so growth would have been even larger if more companies hadn’t decided to self-insure their WC. 

The increase was largely driven by higher payroll – to be expected as we continue to (haltingly) recover from the recession.  However, there was also less discounting by carriers who’ve generally decided to get tougher on pricing and avoid cutting rates to win business – a clear sign of a hardening market.  

Mealy referenced firming/increasing pricing and other hardening-market-leading-indicators several times …

This pricing discipline – and a host of other contributors – led to a 5 point improvement in WC operating results for private carriers – from essentially flat to a 5% pre-tax operating gain.  Interestingly, state funds showed an ever larger improvement –  upwards of 7 percent (however their combined ratios remained much higher than private carriers at 124, balanced by a better return on investment than the private carriers).

One not-too-dark cloud on the horizon is reserve deficiency; NCCI estimates the workers’ comp industry needs to add $13 billion to reserves, up from $11 billion in 2011; as a percentage of total reserves it isn’t that much of an increase..

Another definitely-dark cloud is the continued lethargic growth in employment; this is particularly problematic in manufacturing and construction, industries that drive over a third of workers’ comp premium.

Finally we aren’t going to see investment returns anywhere close to the mid-teens we’re enjoying now (from long-ago bond purchases among other vehicles).  Thus there will be even more pressure on workers’ comp insurers to at least break even on an underwriting basis in the next few years.  Can’t make up for an underwriting loss if your bond portfolio is returning 2-3 percent…

What does this mean for you?

We’ve got to keep focused on underwriting discipline – and claims cost management – as our buddies in the investment dept. aren’t going to bail us out much longer…


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Joe Paduda is the principal of Health Strategy Associates

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