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By ANGELA CHILDERS, a freelance writer based in Chicago

CHICAGO---Robert Hartwig, the president and chief economist of the Insurance Information Institute, presented grave statistics on the state of workers' comp, but offered some hope that the economic recovery is in the works and the industry will rebound.

"Something else changes in an economic downturn," he said. "During recessions, what you see is an acceleration in the drop of claims frequency ... but this claiming behavior does change."

While companies will see an ease in indemnity severity, he said, medical costs have and will continue to increase. In addition, rate of return on investments that insurers use to pad their earnings have declined from an average of 20 percent in 2005 to just 4 percent to 4.5 percent today.

"To the extent that investment portfolio earnings have remained depressed, there is more pressure on premium," he said. But premiums have fallen overall, in part because of economic issues but also due to competition.

INFLATION

However, even more of a concern, according to Hartwig, are the increasing medical costs facing workers' comp and disability managers. Despite the peak of inflation in August 2008, and a temporary deflation produced by the recession, medical costs have not gone down.

Speaking at the 18th Annual National Workers' Compensation and Disability ConferenceŽ & Expo in Chicago, Hartwig said soaring medical inflation is among the most serious long-term challenges facing casualty, disability and long-term care providers. With the influx of funds from the Federal Reserve into the U.S. economy and a mushrooming deficit, the risk of accelerated and sustained inflation is real. Inflation, medical costs that stay about 50 percent above general inflation and high tort costs all could have a dramatic effect, Hartwig warned.

"Medical claim costs are rising, irrespective of the economy or healthcare reform," he said, "They're rising at a pace even above what has been seen in the general healthcare system. Part of this is to be expected, since we're not treating the same types of claims. But these costs do need to come under some additional control. They're unsustainable in the long run."

Premium growth has also been on the decline, Hartwig said, adding that 2009 numbers most assuredly show a drop.

"When you think about pricing the workers' comp arena, what we see is a pricing cycle that very much mirrors the overall underwriting cycle," he said.

HEALTHCARE REFORM AND COMP

Compounding the challenges facing workers' comp professionals is the contentious healthcare reform debate causing concern in all sectors of the insurance and healthcare professions.

"There's no doubt that we need healthcare reform in America," said Hartwig, citing projections that healthcare costs will represent 20 percent of gross domestic product by 2018 and currently stand at 17 percent.

Some proposed reforms have included rolling the workers' compensation medical piece into the general healthcare plan. While this issue isn't currently sitting before legislators, Hartwig warned workers' comp and disability managers not to take comfort yet.

"It's not dead ... it could come back," he said, "We have to be aware of that."

Hartwig also said to be wary about proposals to revoke insurance companies' exemptions from federal antitrust legislation and the exclusion of medical malpractice reform, which could potentially lead to billions in lawsuits.

(Click here to read all of our other coverage from the Annual National Workers' Compensation and Disability ConferenceŽ & Expo.)

November 18, 2009

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