The short answer, to a question that concerns us most, is that our jobs and any realistic career goals we have been nurturing are not at risk.
With one exception, which is strong growth in medical costs, the workers' comp system is quite stable, state by state and nationally.
A month ago, Washington put into place a rescue package designed to restore confidence and extricate the economy from a credit crunch. But any quickly formulated plan can misfire. And as the credit crunch is as much an ugly child of fear and uncertainty as it is of actual cash needs, its resolution is figuratively up in the air. This may have adverse implications for workers' comp insurers. Meanwhile a recession which began earlier in 2008 deepens.
Let's address first the effect of financial market turmoil on the workers' comp system, in particular the financial stability of insurers.
These insurers come in all shapes and sizes. On balance they are some of the most heavily capitalized, if not overcapitalized, firms in America. They don't depend on short-term credit to fund operations. They don't depend on long-term debt for finance hard assets.
Diversified holding companies, such as The Hartford Financial Services, have more freedom to invest their way into serious trouble. But their workers' comp insurance operations have regulatory fences around them. Witness AIG's insurance units.
Workers' comp insurers are vulnerable to steep declines in corporate valuations related to their investments. They invest in a lot of private sector fixed income securities, some of which may have already declined in value. The investment portfolios of workers' comp insurers were not compiled with any serious concern about a major credit crisis. Even Wall Street's own masters of the universe haven't predicted where the cow patties lie.
By and large the profitability of workers' comp insurers is adequate.The primary cause of insurer failures, fatal blunders in predicting claims costs, is not a factor today in part due to the recession.
So long as claims costs and other expenses stay below, or match, premium revenue, insurers can achieve returns on equity in the low teens. And they have. (I infer this from the annual review of the National Council on Compensation Insurance, published earlier this year.)
Premiums have been heading down. Insurance premiums in early 2008 were, according to the annual analysis done by Actuarial and Technical Solutions, set to be 5 percent lower than in 2007. The average cost of claims continues to rise. Is this a sign of trouble?
Recessions, however, lead toward lower claim frequency because less tenured workers tend to be laid off first, shifting the workforce to more seasoned workers, who have fewer injuries due probably to on job experience. The NCCI reports a strong correlation between increasing age and lower claim frequency. Age is a pretty good proxy for job experience. The research is not quite as clear about whether workers, when experiencing recession times, hold off claiming and shorten their disabilities in order to retain their jobs.
In any event, recession-induced lowering of frequency, on top of the long-term trend of fewer injuries, should temper the growth in claims costs.
is a Vermont-based columnist for Risk & Insurance®.
November 1, 2008
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