P&C Outlook for 2015
Rate increases that will slow or outright decline for the property and casualty insurance industry is just one of the major trends as we enter 2015.
Keefe, Bruyette & Woods analysts expect insurers’ operating earnings to improve modestly in 2015, mostly from the “earn-in” of 2014 rate increases versus still-benign loss cost inflation, partly offset by fading reserve releases and normal catastrophe losses.
KBW’s Managing Director Meyer Shields said workers’ comp and some other casualty lines, general liability and commercial auto liability will see rate increases, albeit at a slower pace, while property lines will continue to decline.
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” — Meyer Shields, managing director, KBW
“There are a lot of insurance carriers and so it remains a very competitive marketplace,” Shields said. “Companies believe they can earn an adequate return and still price competitively, which should drag down prices” but he noted that pricing was “on a line-specific basis.”
KBW also expects loss cost inflation to pick up somewhat, “but not materially so,” as insurance loss cost trends has been very suppressed lately, he said. Moreover, given the decline in interest rates, there will be a continuation of lower investment income and overall returns will also come under pressure.
Potential Pricing Challenges
In a report released in December, KBW analysts wrote that two scenarios could disrupt the trend of decelerating or declining prices.
“First, a resurgence of claim cost inflation could quickly erode prior and current accident-year profitability, which would produce a year or so of weak earnings, but would also probably jump-start rate increases,” the analysts wrote.
“On the other hand, persistently low investment yields could drive the providers of third-party capital to expand their participation into other reinsurance lines beyond property catastrophe and similar short-tailed lines.
“We don’t think an expansion is imminent, both because it would tie up capital for longer, and because expected returns for most lines are much lower than was the case for property catastrophe almost two years ago,” they wrote.
“But we believe that the traditional industry players are rational and disciplined enough to avoid obviously destructive pricing, so it would probably take external forces to really disrupt pricing.”
The P&C industry’s underwriting performance continues to lag behind 2013, but remains favorable, according to A.M. Best’s Nine Month Financial Review of the U.S. P&C industry published Dec. 16.
The pure loss ratio increased by 2 points to 58.2 for the nine months through Sept. 30, 2014, primarily as a result of higher catastrophe losses and reduced benefit from favorable development of prior accident years’ loss reserves.
Favorable Commercial Lines Outlook
While net premiums written (NPW) grew, the pace of that growth has slowed. However, increased NPW has benefitted the underwriting expense ratio, as those expenses climbed at a slower pace than NPW, according to the rating organization.
The commercial lines segment posted another set of favorable results for the nine months ended Sept. 30, although some underwriting performance deteriorated somewhat year over year, according to A.M Best’s report.
Through the first nine months of 2014, the segment’s combined ratio was 97.6, compared with 95.6 posted the same period in 2013. Net income totaled $19.2 billion, down $9 billion from a year earlier.
A.M. Best’s analysts are seeing a continuation of the trends exhibited earlier in 2014, said Jennifer Marshall, an assistant vice president in the property casualty ratings department.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014.” — Jennifer Marshall, assistant vice president, property casualty ratings, A.M. Best
“Moderation in catastrophic losses continues, as it was yet another year without a major hurricane hitting the U.S. East Coast, which typically is a substantial driver of losses for third quarters,” Marshall said.
A.M. Best’s analysts are also seeing a slowing in premium increases, she said. They also believe the industry in general is well-capitalized, though they have concerns in the commercial line segment, specifically related to questions about reserves in recent years for companies that write a significant amount of long-tail business.
“We also now have a negative outlook on the reinsurance sector, but we have seen some solid results, so we expect the industry will post an underwriting profit for 2014,” Marshall said. Overall, “the industry seems to be performing in line with what we expected for this year.”
Morgan Stanley researchers believe that alternative capital such as catastrophe bonds is driving “secular changes” in the global (re)insurance ecosystem, according to a report released in December.
“We estimate that alternative capital currently accounts for 15 to 20 percent of global reinsurance capacity,” the analysts wrote. “We see it as a secular shift that disrupts balance sheet-based reinsurance models with a goal of directly matching risks with the most efficient capital.”
However, the trend also offers opportunities for primary insurers to re-enter markets and lines of business, to lower operating costs through lower-priced reinsurance, and to open up new revenue streams by managing third party capital.
“Those that adapt can not only survive but thrive, in our view,” the analysts wrote. “Longer term, we believe thriving reinsurers that adapt to this secular change should (1) maintain strategic relevance (size and breadth), (2) manage third party capital, (3) become closer to the end customers, or (4) focus more on investments (asset-manager-backed reinsurers).”
Insurers Using More CAT Bonds
Insurers of the last resort are increasingly using catastrophe bonds and other similar products to transfer some of their peak exposures to the capital markets, according to a rating agency A.M. Best.
Insurers of the last resort are those that include Fair Access to Insurance Requirements (FAIR) plans, quasi-state-run insurance companies and beach/windstorm plans.
According to a report by A.M. Best, these entities have welcomed the growing availability of insurance-linked instruments such as catastrophe (CAT) bonds, insurance-linked funds and industry loss warranties (ILWs).
“Given an increase in exposure to loss for insurers of the last resort, CAT bonds have provided another alternative for these entities to cede part of their peak exposures as a complement to the traditional reinsurance market,” said Asha Attoh-Okine, author of the report.
“Catastrophe bonds also provide multi-year coverage as opposed to most traditional reinsurance programs,” he said.
Approximately $5.6 billion in CAT bonds have been issued by seven of these entities from 2009 through Sept. 30, 2014, according to the A.M. Best report.
The two main perils that were covered were hurricanes and earthquakes occurring in the respective regions that the bonds were placed.
Hurricanes accounted for approximately $4.53 billion, or 81 percent, with earthquakes taking the other $1.05 billion, or 19 percent, for these entities during the period reviewed by the ratings agency.
“The increased use of these insurance-linked instruments is due to growth in investor demand,” said Attoh-Okine.
“We have specialized insurance-linked securities funds, whose mandate is to invest in insurance exposure, hedge funds, and pension funds all participating in this market. Investors have been attracted to these products given the low-interest environment for fixed income securities of similar quality and the perceived minimal correlation to the general financial market.
“Sponsors have also continued to increase the use of CAT bonds and other insurance-linked instruments to cede their peak exposures.
“Lately,” he said, “we have seen a decrease in spread [price] for the same level of risk for CAT bonds, providing sponsors cost relief when compared to the traditional property catastrophe reinsurance market.”
Advantages and Drawbacks
Among the advantages such products offered insurers are multi-year coverage and minimal credit risk versus the traditional reinsurance market, he said. They also provide another dimension to diversify and manage catastrophe risk.
“The main drawback for some of these instruments, for example, CAT bonds and ILWs, is the lack of reinstate features when compared to the traditional reinsurance program. (Reinstate implies the restoration of the reinsurance limit of an excess property treaty to its full amount after payment by the reinsurer of a loss as a result of an occurrence).
“Another criticism for the use of these instruments,” he said, “is whether investors’ participation will continue in case of property catastrophe insurance market disruption as result of a huge catastrophe event or if we start seeing a continuous increase in returns for other fixed income instruments.”
According to Attoh-Okine, if a major hurricane or other natural disaster triggers one of the CAT bonds, the sponsor of the bond will be reimbursed for the loss amount up to the amount of the CAT bond. In such a case, investors will lose part or all of the principal amount and the corresponding interest proceeds.
The A.M. Best report concluded that the increasing usage of CAT bonds and similar instruments add to recent improvements in the modeling of peak risk exposures, but also “adds another dimension to diversifying and managing catastrophe risk.”
In addition, the report said, other areas that might benefit from the use of various capital market instruments to transfer insurance risk include terrorism risk exposure; assigned risk non-property plans facing inadequate pricing/capacity issues, (e.g., workers’ compensation, auto, accident/health, etc.; and the National Flood Insurance Program, which provides flood insurance to approximately 5.5 million U.S. properties with total insured values exceeding $1 trillion, and growing.
The Tools of the Trade
Integrating medical management with pharmacy benefit management is the Holy Grail in workers’ compensation. But getting it right involves diligence, good team communication and robust controls over the costs of monitoring technology.
Risk managers in workers’ compensation can feel good about the fact that opioid use is declining slightly. But experts who gathered for a pharmacy risk management roundtable in Philadelphia in June pointed to a number of reasons why workers’ compensation professionals have more than enough work cut out for them going forward.
For one, although opioid use is declining, its abuse and overuse in legacy workers’ compensation claims is still very much a problem. An epidemic rages nationally, with prescription drug overdose deaths outpacing those from the abuse of heroin and cocaine combined.
In addition, increased use of compound medications and unregulated physician dispensing are resulting in price gouging and poor medical outcomes.
Although individual states are attempting to address the problem of physician dispensing of prescriptions in workers’ comp, there is no national prohibition against it: That despite substantial evidence that the practice can result in ruinous workers’ compensation medical bills and poor patient outcomes.
“The issue is that there isn’t enough formal evidence to indicate improved outcomes from the use of compounds or physician dispensed drugs, and there are also legitimate concerns with patient safety,” said roundtable participant Jim Andrews, executive vice president, pharmacy, for Duluth, Ga.-based pharmacy benefit manager Healthcare Solutions.
Andrews’ concerns were echoed by another roundtable participant, Dr. Jennifer Dragoun, Philadelphia-based vice president and chief medical officer with AmeriHealth Casualty.
“When we’re seeing worsening outcomes and increasing costs, that’s the worst possible combination of events,” Dr. Dragoun said.
Whereas two years ago, topical creams and other compounds with two to three medications in them were causing concern, now we’re seeing compounds with seven or more medicines in them.
How those medicines are interacting with one another, and in the case of a compound cream, how quickly they’re being absorbed by the patient, are unknowns that are creating undue health risks.
“These medicines haven’t been tested for that route of administration,” Dragoun said.
In other words, the compounds have not been reviewed or approved by the FDA.
Carol Valentic, vice president of cost containment and medical management with third-party administrator Broadspire, said her company’s approach to that issue is to send a letter to providers, through the company’s pharmacy benefit administrator, alerting them to the fact that compounds are not FDA-approved and could be dangerous.
Other roundtable participants said they employ utilization review of every prescribed compound medication. They’re finding that the inflation of the average wholesale price for prescriptions that pharmacy benefit managers are battling in the case of single medications is happening with compounds as well, to the surprise of probably no one.
“The cost of compounds is doubling every year,” Healthcare Solutions’ Andrews said.
Kim Clark, vice president of utilization management with Patriot Care Management Inc., a division of Patriot National, Inc., said Patriot has their own software, DecisionUR, and opioids as well as compound prescriptions can be directed from the PBM to Utilization Review.
In the area of new worries in workers’ compensation, and there are plenty of them, Dragoun also pointed to the introduction of extremely high cost, albeit extremely effective specialty medications, such as those being used to treat Hepatitis C. Treatments in this area can run into the hundreds of thousands of dollars.
Domestic drug manufacturers, pressed to pursue profits as their product lines mature and their margins level off, are jockeying for dominance in this area.
“This seems to be a route that a lot of drug makers are going after. Very narrow markets but with extremely high cost medications,” said Deborah Gleason, clinical resources manager, medical programs, with ESIS, the Philadelphia-based third-party administrator that is part of ACE Group.
Tools of the Trade
Given how substantially the use of prescriptions can balloon the cost of a workers’ compensation claim and undermine outcomes, a number of tools are in the market that can help risk managers rein in costs.
One is urine drug monitoring, which can catch cases of drug diversion, or instances where an injured worker is ingesting unprescribed substances. But the use of that test can create its own problems, namely overutilization.
Gleason, with ESIS, Inc., and others use urine drug monitoring. But when the test is overused, say by being conducted every month instead of quarterly as is recommended, the members of the Philadelphia roundtable said its costs can outrun its usefulness.
Test results are frequently inconsistent, signaling that the injured workers aren’t taking the prescribed medication or are taking something they shouldn’t be. Drug testing shouldn’t be used in isolation but rather as a component of integrated medical management.
“What’s emerging today, and in some companies more prevalently, is the integration of managed care with pharmacy benefit management,” roundtable participant Valentic said.
“When we’re seeing worsening outcomes and increasing costs, that’s the worst possible combination of events.”
— Dr. Jennifer Dragoun, Vice President and Chief Medical Officer, AmeriHealth Casualty
In other words, it’s not enough to flag a script or pick up a urine drug monitoring test result. There needs to be a plan or a system in place that says what action should be taken with the patient once that information has been received.
Identifying a potential problem early and taking action on it is key, said ESIS’ Gleason. She added that the patient’s psychological state, including how they react to and perceive pain, is something that more risk practitioners should consider.
Obstacles to assessing someone’s psychological or psychosocial state, according to roundtable members, include a lack of awareness or acceptance of its possible advantages on the part of patients and physicians. After all, we’re talking about an assessment, a list of questions, that should take no more than 15 minutes to carry out.
If a treating physician or case manager doesn‘t conduct a psychological test but is still concerned about the potential for pain medication abuse, there is one key question they can ask an injured worker, according to AmeriHealth Casualty’s Dragoun.
“There is one question that predicts far more than any other attribute of a patient whether they are likely to abuse narcotics, and that is if they have a personal or family history of substance abuse,” Dragoun said.
“You know they may ask that about the patient, but I don’t know how many ask it about the family,” Patriot Care Management’s Kim Clark said.
Pharmacogenetic testing, that is testing an individual for how they might react to certain drugs or combinations of drugs, and not — let’s be clear about this — whether they are predisposed to addiction, is also entering the market.
But as is the case with urine drug monitoring, the use of pharmacogenetic testing is no cure-all and the cost of it needs to be carefully managed.
Some vendors are pitching that it be applied to every case in a payer’s portfolio. The roundtable participants in Philadelphia agreed that it should be used with far more discretion than that.
Regulating the Regulators
It’s a given in the insurance business and in workers’ compensation that regulators in all 50 states call the shots. There are few national laws that regulate the hazards faced by workers’ compensation risk managers and injured workers.
Having said that, is it really such a pipe dream to think that the federal government could step in and provide leadership in an area that is so prone to confusion, risk and self-serving behavior on the part of some vendors and medical practitioners?
If the Philadelphia roundtable as a group could point to one place where federal regulators could do some good it would be in the area of physician dispensing. Many states have enacted legislation to curb the practice, as there is no data to prove better outcomes, and regulation by the federal government would be of benefit, the Philadelphia roundtable concluded.
Another area would be to require FDA oversight for compounds.
“The minute you need to have FDA approval of a compound, that’s going to stop it,” Broadspire’s Valentic said.
It’s a notion worth considering. After all, lives are at stake here.
Given the lack of oversight from the federal government, the roundtable participants pointed to measures in a number of states that are worth emulating. The Texas closed formulary, which limits the range of medications that can be prescribed, is one example.
The requirement in the State of New York that a prescribing physician check a state registry — what’s known as a prescription drug monitoring program — to check whether a patient is already taking or has a prescription for a controlled substance, is another good example of a state government stepping in to ensure the safety of its residents.
“The minute you need to have FDA approval of a compound, that’s going to stop it.”
— Carol Valentic, Vice President of Cost Containment, Medical Management, Broadspire
Pennsylvania also earned praise from the roundtable for recently passing a measure limiting the amount of medication that a physician can dispense to an initial supply.
With different regulations in every state and with the average wholesale cost of prescriptions constantly on the rise, pharmacy benefit management is an art requiring constant vigilance.
“It’s not an original thought, but if you stop and think about all the things that are happening in society with the addictions and the costs, the cost of doing nothing is greater than the cost of doing something.
I think that’s why everybody is doing something,” Healthcare Solutions’ Andrews said.
For more information about Healthcare Solutions, please visit www.healthcaresolutions.com.
Opinions of the roundtable participants are the opinions of each individual contributor and are not necessarily reflective of their respective companies.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.