Category: Property and Casualty

Aug
17

Climate change’s hidden impact on workers’ comp

Posted by Joe Paduda on Wednesday, August 17th, 2022 | Comments

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 CNN.com

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.

Feb
23

Cash cows, Corporate cut-backs and Corporate-speak

Posted by Joe Paduda on Wednesday, February 23rd, 2022 | Comments

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.
Aug
17

COVID’s costs; 3 P&C insurers report

Posted by Joe Paduda on Monday, August 17th, 2020 | Comments

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)

Takeaways

  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.
Jan
7

A wake-up call for the insurance industry

Posted by Joe Paduda on Tuesday, January 7th, 2020 | Comments

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?

 

 

Jul
10

Sedgwick gets bigger.

Posted by Joe Paduda on Wednesday, July 10th, 2019 | Comments

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?

Apr
29

RIMS reminders

Posted by Joe Paduda on Monday, April 29th, 2019 | Comments

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)

Sep
12

Florence and work comp

Posted by Joe Paduda on Wednesday, September 12th, 2018 | Comments

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.

 

Aug
28

Asbestos is back!!?

Posted by Joe Paduda on Tuesday, August 28th, 2018 | Comments

The Trump Administration has loosened rules that will allow broader use of asbestos in manufacturing.  

Here’s how Fast Company put it:

A lengthy report of EPA’s new “framework” for evaluating risk, placed into effect this month, detailed how it would no longer consider the effect or presence of substances in the air, ground, or water in its risk assessments—effectively turning a blind eye to improper disposal, contamination, emissions, and other long-term environmental and health risks associated with chemical products, including those derived from asbestos.

No one knew how dangerous asbestos was until people started dying from exposure to it. How many thousands of dads, brothers, friends, moms and sisters would have been saved if researchers had studied exposure risks and informed the public?  How many tens of billions of dollars would have been saved, not spent on medical care, remediation, lawyers fees?

I don’t think we’ll see any big increase in the use of asbestos – the litigation risk is just astronomical and no insurance company would allow it – so no business will use it (wait, there are unscrupulous business owners that will do anything for profit, so there is some risk…)

But that’s not the point.

The point is that the health risks of any number of substances, compounds, fibers, chemicals will NOT be evaluated before we are exposed to them.

I’m thinking liability insurers are going to be quite concerned by this.

With the EPA abdicating its responsibility to protect the environment and us, the risk of lawsuits and huge awards increases dramatically.

While no insurance company will accept the liability for increased use of asbestos, they may well start re-writing coverage to ensure they aren’t on the hook for tomorrow’s asbestos suits.

What does this mean for you?

Increased health risks over the long term, and increased insurance costs over the near term.

Nov
20

Post vacation update

Posted by Joe Paduda on Monday, November 20th, 2017 | Comments

Back from a much-needed family trip to Sedona AZ where the mountain biking was phenomenal.

(son Cal and son-in-law Keith plus the old guy)

Here’s what happened while I was in the land of the vortices…

WCRI’s annual conference in March 2018 will be kicked off by the former head of the Bureau of Labor Statistics, Dr Erica Groshen.  Always a must-do; sign up soon or risk being wait-listed for the March 22/23 event in Boston.

The latest from the brainiacs from Boston is a report on California’s work comp medical benchmarks.

Colleague and good friend Frank Pennachio of Oceanus Partners will be opining on misaligned incentives in work comp at NWCDC in Vegas next month.  Frank’s terrific delivery, vast experience and deep knowledge of how things really work in work comp will make this one of the most valuable sessions for employers.

Climate change’s effects are being felt everywhere – and the insurance industry may be the industry most affected. An excellent Harvard Business Review article illustrates the major, if not central role P&C Insurance is playing in forcing us to acknowledge the reality of human-caused climate change.

Differential pricing for high-risk areas (we’re talking about you, south Florida, and you, coastal areas) and Catastrophe bonds are just two of the ways the insurance industry is forcing businesses, governments, and individuals to deal with climate change.

Finally, NCCI’s out with it’s assessment of the 2015 decline in work comp medical costs; key takeaways (note California and New York were not included):

  • a drop in utilization of physician services was the key driver
  • inpatient facility costs increased 6 points, driven by a huge increase in very expensive inpatient stays 
  • there was LOTS of intrastate variation…

Good to be back at work – enjoy the short holiday week.

Sep
15

Friday catch-up

Posted by Joe Paduda on Friday, September 15th, 2017 | Comments

Hurricane recovery

Thanks to NCCI for a very timely article by Chief Actuary Kathy Antonello on evaluating construction contractors based on information on experience modification rates.

Key takeaway – “It’s not appropriate to use E-mods to compare the relative safety of employers.”

Very interesting take on efficiency in construction; the Economist notes that the construction industry has become LESS efficient over the last few decades. While this may well be about to change, for those rebuilding in hurricane-ravaged areas, costs will be much higher, reconstruction take longer, and preparation to deal with the obvious impacts of climate change may not keep up with the speed of that change.

Blockchain continues to work its way into the insurance industry. An excellent piece in the Harvard Business Review notes that insurance is especially suited for blockchain. Both are predicated on spreading information, and in the case of insurance, that information deals with risk. Blockchain is uniquely suited to spreading risk as at its core it is a “trust and efficiency engine.”

Key takeaway…

it will require uncomfortable transparency [from established insurers] and price corrections in their business models. This will be toughest on the portions of the industry that are the least differentiated, where consumers often decide based on price: auto, life, and homeowner’s insurance. [emphasis added]

And there’s this telling point, which identifies a key reason insurers should be worried…

trust in business institutions, and the financial services sector in particular, is at an all-time low. While the large banks are at the center of this trust vacuum — with a seemingly steady stream of scandals, such as the recent Wells Fargo account rigging debacle — the erosion of trust is bad for everyone

Ignore at your peril.