Profit shifting aka work comp is funding the P&C industry’s losses.

Or, it is a GREAT time to be a monoline carrier.

The property & casualty insurance business is a tale of two extremes, with work comp profits offsetting losses across all other lines.

That’s one reason multi-line insurers are dragging their feet on cutting work comp and continuing to hoard billions of dollars in excess reserves.

Work comp is hugely profitable, with insurers raking in hundreds of millions in profits…with $10+ billion more in excess reserves, aka unrealized gains.

chart extract from S&P

Other insurance lines are the yang to WC’s yin.

S&P predicts all other lines will lose money on an underwriting basis again this year…

Here’s the money quote (pun intended):

➤ Dismal first-quarter 2023 direct incurred loss ratios in the homeowners and private auto business suggests a repeat of 2022, when highly favorable underwriting results in the commercial lines, aided in part by favorable prior-year workers’ compensation reserve development, were more than offset by the personal lines losses. [emphasis added]

and implications thereof:

The [2022] workers’ compensation combined ratio of 83.9% represented a decline of nearly 3.3 percentage points from the 2021 result. It ranks as the second-lowest such result in the last 25 years, owing to relatively benign trends in the current accident year and a fifth straight calendar year of favorable prior-year reserve development in excess of $5 billion. [emphasis added].

What does this mean for you?

Those who pay comp premiums are subsidizing insurers’ losses in personal and commercial lines – especially personal auto.


Long COVID is real, “social inflation” is not.

Didn’t post this week…was in Chicago for the annual father-son trip to watch the Sox play the Cubs…very fun time!

While I was relaxing in the stands, shockingly the world continued turning…

WCRI’s report on long COVID’s impact on work comp was release, examining claims with an average of 18 months post-infection…my takeaways  include:

  • one out of 19 COVID claims developed long COVID
  • medical costs average less than $30k
  • temporary disability benefits run a bit above 20 weeks
  • Long COVID’s impact on workers’ comp is pretty minimal

Risk and Insurance weighed in on “social inflation”, a not-well-defined term insurance folks use to characterize their not-very-well-founded belief that society is driving up casualty claim costs.  VERY briefly, insurance execs complain that high jury awards to claimants are driving up insurance costs…however there’s precious little real research supporting that view. 

This from Ken Klein’s presentation to NAIC in 2022…

What does this mean for you?

Stop catastrophizing until you can prove something exists.

Start catastrophizing when the data is convincing. 




We are all Hawaiians

The disaster in Maui is one of the most awful things I’ve ever seen. An entire town of 12,000 is gone, burned to the ground by a horrific firestorm.

At last 36 are dead, while countless others survived only because they jumped into the ocean to avoid being burned to death.

Here’s how we should think about this.

Of all the places in the US, no one ever thought Maui, a tourist paradise, would ever be in the news for a devastating wildfire. If it can happen in Maui, it can happen in Ohio, or New Jersey, or your home town.

Think it can’t?

So did residents of Lahaina.

What does this mean for you?

Prepare. Now. Not tomorrow, not next week, not as a 2024 goal.  Now.

Here’s a detailed discussion along with a list of what to do.

note – I am on Threads – joe_paduda


Climate change’s hidden impact on workers’ comp

Storms are more intense and more frequent; so are droughts. Everywhere is getting hotter. When it comes, rainfall is more intense.

The direct impacts of climate change on workers’ comp are pretty obvious:

  • higher risk for public safety workers;
  • increasing heat exposure and associated risks for agriculture, construction, forestry and other “outside” workers;
  • more infrastructure and construction work and associated payroll to rebuild and adapt

[Jeff Rush from California Joint Powers, Louisiana Work Comp Corporation’s Jill Leonard and I will be talking about climate change’s impact on workers’ comp at the National Comp Conference in Vegas) – mark your calendar for 12:30 on Thursday October 20.]

Thinking about this, there are both acute and chronic issues at hand; Fire, flood, and storm are acute events. This requires a crisis management approach; anticipate, prepare, triage, respond, recover.

Heat is different – it is chronic; unlike events it is pervasive, consistent, slowly increasing. This requires a more traditional risk management approach; assess, evaluate impacts, plan, educate, train, monitor, report, improve.

There are other hidden impacts, ones that payers would do well to think through.

For example…let’s use Hurricane Harvey which hit southeast Texas in 2017 causing $125 Billion in economic damage. As human-caused climate change increased Harvey’s severity by 30%; climate change’s added cost ran well into the tens of billions for that one storm alone. For a very detailed discussion of this see here.

photo credit

Research published in the Harvard Business Review found:

  • 90% of businesses in the area surveyed by the researchers lost revenue due to Harvey;
  • 40% of businesses experienced property damage of which
    • over a a quarter were closed for a month, and
    • one out of eight were closed for more than three months.

Think about the – 1/8th of businesses are closed for more than a quarter, a time when payroll is likely non-existent – or close to it.

No payroll, no premiums.

Well, you may say, insurance covered that.

Nope – only 15% of surveyed firms got a payment – of any kind – from insurance.

What does this mean for you?

The more you think about human-cause climate change, the more impact you find.


Cash cows, Corporate cut-backs and Corporate-speak

Six weeks ago I predicted:

TPAs will add more business, mostly from carriers.
As work comp continues to shrink, insurers will ramp up efforts to shed assets and expenses to reduce their cost structure. By outsourcing claims, carriers are trading the high fixed costs of a claims infrastructure for the variable cost of a per-claim admin fee.
The smarter carriers will negotiate hard so they don’t get screwed by medical management and other non-fixed fees…but many carriers aren’t that smart…

and…Insurers will reduce staff, particularly in claims.

Here’s an update.

There’s been lots of rumors out there about AIG’s plans to get out of the claims business and associated layoffs, so I reached out to AIG. (full conversation below)

Net is I’m hearing there have been layoffs in IT (never a strong suit at AIG), work comp claims, and medical management services.  Likely other areas as well.

Focusing on work comp/medical management, this is a) wholly predictable and b) likely to happen at other insurers.

The reasons are straightforward:

  • work comp is a declining industry
    • in 4 years there will be 10% fewer claims than there are today
  • work comp is a classic cash cow; mature, throwing off lots of cash and stagnant

The implications are clear – why would an insurance exec invest in a business that is declining, way behind in technology investment, has an aging workforce and can’t attract young talent?

Especially when it can outsource claims to a TPA, thereby:

  • reducing fixed costs and unallocated loss adjustment expense (ULAE)
  • eliminating the need to invest in IT upgrades for claims and medical management systems
  • getting rid of an older and expensive workforce and the attendant costs for real estate, IT support, telecom, benefits and on and on.

Congratulations to Gallagher Bassett, which appears to have landed a lot more work. This will help GB immensely as it will gain revenue it can use to make those IT investments, hire and train staff, and upgrade operations.

Finally, corporate-speak.

Why AIG would not answer questions clearly and cogently is beyond me. Without those answers, one has to look to message boards and contacts at the company and those recently departed, sources that have – by definition – more narrow perspectives influenced and affected by the impact of AIG’s actions and non-actions.

That doesn’t mean those perspectives aren’t valid – not at all. It does mean that you, dear reader, don’t have the full picture as to what is happening at AIG and why.

What does this mean for you?

If AIG work comp is a customer, pay very close attention.

Email conversation:

here’s what I asked AIG

I’m working on a blog post re carriers using TPAs for workers’ comp claims.  I understand AIG is in the process of outsourcing WC claims to Gallagher Bassett; evidently there was an internal communication to employees in December addressing this.

My questions:

        1. AIG has long used TPAs for claims handling, but also handled claims internally. Is AIG in the process of outsourcing all/most WC claims that were previously handled internally?
        2. If so, what is driving this decision?
        3. Sources indicate the timing is Q2 2022; is this accurate?
        4. Indications are AIG is also reducing the role of HDI; can you speak to that?

Here’s AIG’s response:

AIG has entered a strategic partnership with Gallagher Bassett for the shared management of our “bundled” workers’ compensation claims in the U.S. This partnership will combine AIG’s in-house claims expertise and customer service with Gallagher Bassett’s industry-leading infrastructure, analytics and technology. AIG will continue to handle major loss and specialty claims and medical management, while also providing technical and strategic guidance for all claim management and resolution.

And here’s my follow-up

So, thanks for the statement.
Is AIG staff handling claims?
Is AIG doing all the Managed care work but using GB’s IT for claims?
My understanding from AIG staff is that GB will handle claims, so I’m a bit confused.
AIG’s response was classic corporate-speak and – as you can see – didn’t answer my questions. AIG also didn’t respond to my follow-up.


COVID’s costs; 3 P&C insurers report

We are starting to see the impact of COVID on P&C insurers’ financials; so far its not all gloom and doom.

AIG’s COVID costs totaled $458 million for the first half of 2020; Chubb announced $1.16 billion in COVID related costs for Q2, while Travelers‘ “pre-tax insurance losses directly related to the pandemic amounted to $114 million.” for Q2. (note AIG’s numbers are for six months, Chubb and Travelers for 3 months)

Travelers’s results are especially notable as it is the largest writer of workers’ comp insurance. Several quotes from the Q2 conference call merit attention:

  • beyond the healthcare sector, data from some of the state workers’ comp systems suggest that the COVID related claim rate is low relative to the infection rate.
  • That’s likely partly attributable to the fact that the population most seriously affected by COVID-19 skews older and is not the workforce.
  • [there were] fewer traditional workers’ comp claims as more people work from home.

It doesn’t look like workers’ comp is the biggest contributor, as COVID’s costs arose from travel insurance, personal auto refunds, reduced premiums, and lower renewals.

One example – AIG’s travel insurance business got crushed in the second quarter as “you had not only no new sales. You had cancellations…”

According to CEO Evan Greenberg, the $1.16 billion loss “is an estimate of our ultimate loss from the pandemic.”  Chubb’s net premiums written fell by $191 million, mainly from workers’ compensation and commercial casualty payments, including refunds on auto policies.’

Reading between the lines, it doesn’t look like Chubb’s investment income was significantly affected by COVID-related interest rate cuts; the huge insurer’s $112 billion in cash and investments increased by $3.4 billion in Q2 2020. (see CFO Phil Bancroft’s discussion in the transcript)


  1. COVID’s costs aren’t devastating P&C insurers.
  2. While interest rates have dropped, so far this hasn’t had much of an impact on insurers’ investment income.
  3. Insurers with less exposure in the US are doing better; other countries have handled COVID far better than we have.


A wake-up call for the insurance industry

We are stuck in a self-destructive cycle, namely an industry-wide culture that rejects true innovation that leads to a huge talent deficit that prevents innovation.

With few exceptions, there is little in the way of innovation, effective marketing, risk-taking, creativity and substantive investment in systems and technology in the insurance industry. That will be the death of many insurers and healthplans.

As a result, we can’t get enough brilliant, impactful people to work in our business because our culture is anathema to most of them.

So, there’s no innovation.

The most important part of any organization is its people. Yet our industry’s talent deficit is as wide and deep as the Marianas Trench. Sure, there are some very smart folks doing great work – in healthplans, State Funds, private insurers, TPAs, and service companies.

They are the exception, not the rule.

Don’t agree?

How many of your brilliant college classmates chose a career in insurance? In your career, you were blown away by someone’s acumen, insight, brilliance, thinking how many times? How many execs in this business came out of top business or other schools?

Why is this?

I’d suggest it is the very nature of our industry; it isn’t dynamic, doesn’t reward innovation, hates self-reflection, abhors risk-taking, and doesn’t invest near enough in people or technology.

Proof statements, courtesy of The Economist 

  • No insurer ranks among the world’s top 1,000 public companies for R&D investment – yet dozens of insurers are in that top 1000.
  • On average insurers allocate 3.6% of revenue to IT —about half as much as banks.
  • In a study of 500 innovation topics across 250 firms, many insurers are working on the same narrow set of ideas.
  • Many property insurers, whose fortunes rely on forecasting climate-induced losses, are still learning how to use weather information.

Tough to recruit talent to an industry that – for Pete’s sake, invests half what banks do in IT…

  • Or for a property insurer that hasn’t figured out weather is kinda important?
  • Where all your competitors define “innovation” as doing the same stuff you do?
  • That probably spends more on janitorial services than R&D? (Ok, that may be a bit of an exaggeration.)

Many of the big primary insurers in today’s market will be overtaken by the Apples, Amazons, Googles, Beazleys, Trupos, and Slices tomorrow. The names you know are brilliant innovators and have billions upon billions of cash to invest. The names you don’t know have figured out and are diving into markets that the traditional, stodgy, glacially-fast insurers can’t even conceive of – reputational risk, very short-term insurance for specific items, disability coverage for gig workers, and a host of other opportunities.

Oh, and they are doing it without all the paperwork, hassle and nonsense that keeps insurance admin expenses at 20% of premiums while frustrating the bejezus out of potential customers. (having just spent hours on the phone fixing a problem with flood insurance, count me as one)

And no, with rare exceptions health insurers aren’t any better. With structural inflation that guarantees annual growth of 5-8% and an employer customer that has to provide workers with health insurance, plus governmental contracts that pay on a percentage of paid medical, and record profits across the entire industry, there’s every reason to NOT control costs.

Those record profits may well continue till a Cat 5 storm hits the Jersey shore and/or a deep recession hits and/or investment portfolios are crunched by macro factors.

In the meantime, Jeff Bezos will be looking for places to plow some of his hundreds of billions.

Tomorrow – what to do about this.

What does this mean for you?

Critical self-reflection is really hard, and really necessary. This industry is ripe for disruption and it will happen. The question is, what will you – and your company – do?




Sedgwick gets bigger.

Monday’s news that giant TPA Sedgwick is acquiring York from Onex shouldn’t have surprised anyone. Sedgwick has been – and will continue to be – an acquirer. Posting revenues of $2.7 billion last year, the TPA’s recent growth – revenues increased by more than 50% in 2018 – has been driven largely by acquisition.

Bought by private equity firm Carlyle just last year for $6.7 billion (from KKR), Sedgwick’s value has likely tripled over the last few years. Of course, that growth required major expenditures, so it’s not like the owners didn’t invest a lot more than the original purchase price of the business.

Growth is critical to any private equity-owned company and in a highly mature industry the fastest, least expensive, and best way to grow is by buying competitors. VeriClaim and Cunningham Lindsey were two of the larger acquisitions during the last few years, and both were smart buys.  They were strategic, adding different skill sets, customer types and service capabilities in addition to hundreds of millions to the top line.

The York acquisition follows the same game plan; it adds several key assets/capabilities;

  • a highly profitable managed care unit built by former leader Doug Markham (York has it’s own proprietary bill review software…);
  • a wealth of experience in program business management; and
  • strong municipality and governmental entity offerings.

With international capabilities and claim handling expertise in all P&C lines, Sedgwick is positioned to grow by handling claims from extreme weather events driven by climate change. It is also gaining efficiency – which will lead to more growth – in shrinking lines such as workers’ comp.

While I’ve locked horns with CEO Dave North in the past, one has to respect the strategic vision, marketing prowess, and execution skill that has pushed Sedgwick to the top of the TPA industry. Senior management is capable indeed; there’s some solid talent at York that will make it even better.

Last point – and it is a critical one. Over the last decade there have been dozens of PE deals in workers’ comp and P&C services. Most private equity investments performed quite well despite – or more accurately partially because – they used debt intelligently.

One would do well to keep that in mind these days; in and of itself debt is not bad or harmful. What is “bad” is a faulty investment thesis and crappy execution.

What does this mean for you?

Strong leadership, management that can execute, and an industry-leading brand make for success. 

How do you stack up?


RIMS reminders

Morning all!

I’m not attending RIMS, but if you are, a few things to help you survive – and profit from – the week.

1.  Realize you can’t be everywhere and do everything. Prioritize.

2.  Leave time for last-minute meetings and the inevitable chance meetings with old friends and colleagues.

3.  Unless you have a photographic memory, use your smartphone to take voice notes from each meeting – right after you’re done.  Otherwise they’ll all run together and you’ll never remember what you committed to.

4.  Introduce yourself to a dozen people you’ve never met.  This business is all about relationships and networking, and no better place to do that than this conference.

5.  Which leads to help someone out. Yes, you’re incredibly busy and have lots of priorities. Make it a point to listen to someone who looks lost or bewildered, say hello to a student there for the first time, shake hands with a guest from another country.

6.  Wear comfortable shoes, get your exercise in, and be professional and polished.  It’s a long 2, 3,or 4 days, and you’re always ‘on’.

Finally, I’ll echo Sandy Blunt’s advice – in these day of YouTube, phone cameras, Twitter, SnapGram and InstaChat, what you do is public knowledge.  That slick dance move or intense conversation with a private equity exec just might re-appear in a tweet…

overbite.jpg (480×360)


Florence and work comp

Hurricane Florence will devastate much of North and South Carolina and parts of Virginia as well.

Florence will have some impact on workers’ comp – and in some ways already has.

  • Industry capacity – The work comp insurance market remains soft, and until and unless capital dries up, it is likely to remain soft. Insurance stocks took a hit as investors anticipated major losses, and the catastrophe bond market sunk as well. Total projections for insured losses range from $12 to $20 billion, a range that is well within the financial capacity of the industry.
    If current rainfall and storm surge forecasts prove accurate, projected losses can be absorbed without undue stress. I don’t expect Florence to affect work comp premium rates.
  • Preparing for service delays – In conversations with work comp home health care, PBMs and other work comp patient service providers, I learned that these companies are doing a lot to prepare, including:
    • sending patients additional medications, soft goods and consumables in case mail services are disrupted
    • re-locating patients to facilities in case home health care providers can’t reach patients’ homes, or their homes lose utility services for extended periods
    • testing their backup and business interruption processes to ensure they can stay functional
    • re-scheduling office visits, therapy sessions, IMEs and other services
  • Post-storm cleanup and rebuilding – There will be two employment effects – Storm recovery companies will hire thousands of contract workers to help clean up debris and damage from the storm surge, wind damage, and flooding. Most of this will take place in the next couple of weeks. Rebuilding will – of course – take much longer, and will increase hours and wages in construction, logistics, and other industries.  Hiring and payroll increases won’t be enough to move the national needle, but it will be material in the affected states.
    As many of the clean-up workers will be temps, there will be a localized and very short-term uptick in claims.

The bigger story here is future storms will be larger, more damaging, and perhaps more frequent.

Harvey’s rains were almost 40% more intense due to global warming. Changes to the jet stream associated with changing weather patterns have affected Florence’s path.

What does this mean for you?

The climate is changing; weather will too.  Those who deny this do so at their peril.