Economic Factors Leave Workers' Comp Industry in 'Precarious Position'
According to its recent analysis of the workers' comp market, the National Council on Compensation Insurance found that the calendar year combined ratio was 100 in 2009 -- jumping nine points from the previous year. The calendar year combined ratio measures the adequacy of premiums to cover both the benefit costs and operating expenses of the benefit system, not taking into account investment returns. A ratio of more than 100 percent indicates that workers' comp insurers took a loss for the year because premium was not adequate to pay losses, expenses and dividends.
"The workers' compensation insurance industry had a trying year in 2009," said Steve Klingel, president and CEO of NCCI. "And a series of unknown factors -- from the pace of economic recovery to the long-term impact of the new federal healthcare law, among others -- leave the line in a precarious position and facing a host of challenges moving into 2010."
Dennis Mealy, chief actuary at NCCI, said the nine point increase in the combined ratio was the largest single year jump since the mid-1980s.
"These deteriorating underwriting results, combined with the record low interest rate environment left the line at only slightly better than breakeven after investment income is considered," Mealy continued. "The calendar year net written premium declined precipitously again in 2009, for both private carriers and the state funds, as the recessionary impacts, particularly on manufacturing and contracting, along with price decreases driven by declining frequency and the competitive market took their toll. And industry written premium has declined 23 percent over the last two years."
Frequency and insurance costs. While this was bad news for comp insurers, employers celebrated another year of falling claim frequency rates. For states in which NCCI makes rate recommendation, the frequency dropped 4 percent in 2009, after falling 3.4 percent in 2008 and 3 percent in 2007. Researchers said data suggests that the recession put additional downward pressure on frequency, because the lack of hiring allows the workforce to become more experienced and less prone to injury.
Bruce Wood, associate general counsel and director of workers' compensation for the American Insurance Association, said the continued decline in claim frequency is expected.
"In an overall sense, it has been declining for decades," he said. "As the nature of the workforce changes, it will continue to drive down frequency."
NCCI also noted that the price employers paid for workers' comp coverage also declined in 2009 in most jurisdictions. Researchers said bureau rate and loss cost decreases continued, mostly driven by the large frequency declines and moderating increases in medical and indemnity average claim costs working their way into filings.
Medical costs and legislation. NCCI found that medical costs have moderated somewhat over the last few years, even though they continue to increase faster than wages. Researchers found that in four of the last six years, the average cost increases have been between 5 percent and 5.5 percent per year -- down substantially from the at-or-near double digit rates of increases experienced in the late 1990s and early 2000s.
Despite the fact that more states are continuing to look for ways to control medical costs, Wood said they still remain the proverbial "gorilla in the room."
"Medical costs continue to consume a greater percentage of the benefit dollar," he said. "When I first started out in the industry, medical costs represented about 40 percent of comp expenditures. Now they are at 60 percent, even 70 percent in some states, and that's not because indemnity benefits have been cut."
Wood said one of the challenges in the near future will be getting workers' comp pharmaceutical costs under control. These costs represent 14 percent of the total medical expenditures, up from 4 to 5 percent only a few years ago.
"One of the changes that will be front and center will be pharmacy fee schedules," he said. "We have always supported a Medicaid-based fee schedule for pharmaceuticals. Obviously there are other concerns as well, such as the overuse of narcotics and getting a handle on physicians who improperly prescribe certain drugs."
With regard to state reform efforts in 2010, Peter Burton, senior division executive for NCCI's state relations unit, said the "volume and intensity of legislative efforts towards modification of the workers' compensation system may well depend on the economic fortunes of individual states."
With more than 80 percent of legislative seats up for grabs across the country this year, it may be a challenge to push through any radical reforms. However, some major efforts are underway with regard to the privatization of workers' comp markets. In Washington state, for example, business lobbyists are pursuing a voter initiative that would allow private comp carriers to ender the state. Similar efforts are being made in Ohio, Oklahoma and Colorado, where state funds have come under closer scrutiny.
"There will continue to be challenges to the integrity of state funds, specifically with respect to their surpluses, as long as state budgets remain in distress," Wood said.
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June 28, 2010
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