Fate of Two Comp Alternatives Lies With Courts
The push to reform state workers’ compensation systems to allow employers to opt out is by no means secure in Oklahoma, the first state to enact such reform. Similar efforts face new challenges in Tennessee, the second state to seek opt-out legislation.
Eight of nine current Oklahoma Supreme Court justices received their appointments from Democratic governors. In April the justices will hear a constitutional challenge to the law allowing employers to leave the Sooner workers’ comp system by implementing an alternative benefits plan.
By contrast, a conservative legislature and Republican governor friendly toward business interests adopted the opt-out legislation in 2013, bringing the opt-out alternative into law beginning in early 2014.
Claimants presenting the constitutional challenge before Oklahoma’s Supreme Court argue the law is unconstitutional because it denies injured workers due process and creates two sets of workers with disparate rights.
The court’s justices may be sympathetic to such an argument.
Past Oklahoma Supreme Court rulings make it apparent the body leans more liberal in judgment than the state’s “very, very conservative legislature,” said Trey Gillespie, senior workers’ comp director at the Property Casualty Insurers Assn. of America.
“I think everybody in Oklahoma will agree the Oklahoma Supreme Court is significantly more liberal in their view of the construction of laws and the application of laws than the Oklahoma Senate and House of Representatives,” Gillespie said. “There have been instances…where it appears the Oklahoma Supreme Court seems to get a lot of joy out of declaring certain acts of the Oklahoma legislature unconstitutional.”
Bill Minick, president of consulting firm PartnerSource and a chief proponent of efforts to allow opting out of state workers’ comp systems, called the Oklahoma Supreme Court’s makeup “a legitimate consideration.”
But Minick argues that the lawsuit’s goal of preventing employer’s from opting out of Oklahoma’s workers’ comp system will fail in the long run. It “is clear that the Oklahoma legislature is committed to do anything necessary to preserve” the law adopted as the Employee Injury Benefit Act, he said.
Gillespie said opt-out backers are already urging Oklahoma legislation that would adjust the law to mitigate the impact should the lawsuit plaintiffs prevail.
Gillespie and Minick will both speak at the National Workers’ Compensation and Disability Conference & Expo to be held November 11-13 in Las Vegas. They will present two divergent viewpoints on opt out.
Meanwhile, on March 25, Tennessee legislators in the House Consumer and Human Relations Subcommittee deferred taking action on opt-out legislation, which could delay further consideration of its passage until next year.
Two days prior, a Tennessee Advisory Council on Workers’ Compensation voted 6-0 against recommending the legislation that would allow employers to leave the state’s workers’ comp system and set up alternative plans.
The advisory council provides research and recommendations to Tennessee’s General Assembly and to state agencies. Mr. Gillespie testified before the council against the opt-out legislation, embedded in Senate Bill 0721 and House Bill 0997.
Tennessee is the first state where proponents for laws allowing employers to opt out of state workers’ comp systems are seeking favorable legislation after winning the right to do so in Oklahoma.
Conditions for Oklahoma’s adoption of an opt-out alternative were ripe at the time of that legislation’s signing into law by Republican Gov. Mary Fallin. Oklahoma employers were frustrated with a dysfunctional workers’ compensation system while neighboring Texas provided an example of advantages employers could gain by opting out.
Texas has allowed employers to opt-out of its workers’ comp system since that system was first created.
The case Oklahoma’s Supreme Court is scheduled to hear on April 14, is Judy Pilkington and Kim Lee V. State of Oklahoma.
Pilkington was injured in 2014, while working for retailer Dillard’s Inc. Lee was also injured in 2014, while an employee of Swift Transportation Co. of Arizona, according to their legal filing.
They claim Oklahoma’s opt-out law strips them of the right to have their workers’ comp cases heard by an unbiased body.
“There is no due process protection in allowing an Oklahoma employer to OPT OUT of the statutory workers’ compensation system, set up its own benefit plan, make all the decisions regarding benefits, determine who and how a plan can be reviewed, and have total control of the development of the record for appeal,” the plaintiffs’ Supreme Court filing states. “Nowhere along the way is there an agency or court or unbiased tribunal to look at the merits of an injured worker’s case. OPT OUT employers are allowed to replace a judge with a committee chosen by the employer.”
They also argue that the Oklahoma Injury Benefit Act creates disparate rights for accessing benefits. For example, injured employees working for employers that do not opt out generally have one year to file a claim while an employer that opts out may allow only a 24-hour statute of limitation, they claim.
Oklahoma’s constitution prohibits separate treatment of members of the same class of people, said Bob Burke, an attorney representing the plaintiffs.
Asked whether the Supreme Court justices about to hear his case are likely to be influenced by the fact that 8 of them were appointed by Democratic governors, Burke said that “the court has a tradition of maintaining access to justice for injured workers and anyone harmed.”
In its recent 2014 fourth quarter P&C Insurance review, Morgan Stanley Research reports strong results capping off a solid 2014, with benign CAT losses and strong earnings per share continuing a trend of upbeat earnings that spans eight consecutive quarters. But analysts also sees a variety of factors, including flat returns on investment and pricing approaching negative rates, that could pinch insurers in 2015.
“We cited four fundamental headwinds,” said Morgan Stanley Property & Casualty Insurance analyst Kai Pan, one of the report’s authors. The most notable is downward pressure on pricing, due in part to excess capital.
After three years of steady improvement, prices flattened in 2014. Increases in mergers and acquisitions seen in 2014 are expected to continue and even to accelerate, helping to deploy some of this excess capital, but not enough to bolster pricing.
“Pricing will continue to decelerate and could turn into negative territory for the commercial line pricing this year,” said Pan.
If this downward pressure pushes prices below the loss cost trend, or inflation, underwriting margins could deteriorate, creating a second significant headwind. Over the last three years, prices have increased at four to five percent, significantly above the loss cost trend, contributing to an expansion of margin.
Pan cautions that, “Going forward…if pricing is going to be flat or negative, and the loss cost or inflation trend is still positive, there will be a negative spread between the top line premiums and expenses, the claims. Therefore, there could be some underwriting margin compression or contraction going forward.”
Among the primary factors contributing to the industry’s positive performance in 2014 was earnings from the release of prior year reserves made possible by relatively benign CAT activity, but there is no reason to believe that will persist.
“Over the past five years, the companies we cover, the underwriters, about 30 percent of their earnings have been coming from prior year reserve releases,” said Pan.
“If the earnings from prior year reserve releases is going to be slowing down, that is another headwind.”
Pan also cites relatively low earnings from the investment side, something those prior year reserve releases have helped to offset. Industry data shows that 60 to 80 percent of industry earnings comes from investments, and an average of 60 percent of industry investment portfolios are composed of fixed income instruments like bonds.
“The yield on these fixed income instruments has been under pressure for many years,” said Pan. “The 10-year U.S. treasury yield is around two percent.”
Pan points out that even if bond yields improve, investment earnings may continue to suffer. Unless yields increase by 100 basis points or more — something few forecasters expect — as older, higher-yield bonds mature, they will be replaced with new lower-yield bonds.
Robert Hartwig, President of the Insurance Information Institute, acknowledges these possible headwinds, but is still upbeat.
“No one should construe anything in this report as meaning that the insurance industry is anything other than rock solid financially,” said Hartwig.
While he concedes that all of these headwinds “exist to varying extents for different insurers,” he sees them mitigated by a variety of factors.
The trend toward consolidation could help expand margins. Modest inflation and a benign tort environment also help brighten the outlook.
The Federal Reserve’s anticipated interest rate increases will help boost investment earnings. Some of the cited headwinds could actually mitigate each other. Higher CAT activity and a decline in reserve releases, if they occur, would both ease downward pressures on price.
Most encouraging is the overall economic trend, and the industry’s recent track record of outpacing it, Hartwig said.
“We would expect overall premium values to grow somewhere around the 4 percent range and that is substantially better than the overall economic growth, which is 2.5 to 3 percent. So that means the P&C Insurance industry is benefiting from the tailwind of economic growth,” said Hartwig.
“I would certainly expect to exceed economic growth by a point or a point and a half in 2015.”
Pan sees earning requirements as creating a floor on negative pricing, but insurers may find themselves increasingly squeezed between competitive and other downward pressures on price, and a need to maintain a level of underwriting income that can offset weak investment yields.
While navigating that narrowing range may be a challenge, Pan does not see a situation where policies are left unwritten.
“Every company models risk differently,” he said, “so they might have a different pricing strategy and will make different pricing decisions.”
Buyers may see prices decrease, but they may also find themselves having to search a little harder to find insurers willing to write the policies they seek at the price they want.
Hartwig said he has faith insurers will govern themselves effectively.
“You’re not seeing undisciplined pricing in the market today,” he said.
“You’re seeing a very competitive market… There may be some margin compression but you’re not seeing irrational pricing in the marketplace.”
Pan and Hartwig both see insurers benefiting from new tools to help them make pricing decisions.
“There’s no question that insurers have better management information systems in place that allow them …to make sure that any adjustments that need to be made can be made more quickly than in the past,” said Hartwig, something that will help diminish recognition lags as well as the amplitude of the industry’s inevitable cycles.
“Advances in technology in terms of data and analytics, will help [insurers] make more informed underwriting decisions, to maintain a desirable underwriting margin,” said Pan.
“But you will find some players probably underpriced.”
What Is Insurance Innovation?
Truly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.
Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.
“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”
To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.
“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”
An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.
“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company
Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.
“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”
Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”
Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.
The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.
Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.
“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.
Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.
“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.