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A Conning research study, Workers' Compensation - A Bumpy Road from Recession to Recovery, analyzes performance drivers, state differences, industry differences, and insurer behavior to create a picture of where the line may be headed. It also has suggestions for how insurers might best prepare for the changes.

"The economic recovery and rate increases will boost premium," said Joshua Youdovin, a Conning analyst, "Yet we expect that rising medical costs and increased utilization of drugs will reintroduce the specter of inflation in loss costs and reduce profitability even further." The effects of recovery "may bring some new surprises in risks and opportunities in the line."

While Florida focused on reducing legal fees, reforms in Texas provided more control over medical costs. In particular, it mentioned Texas' provisions requiring an approved list of certified doctors for claimants, the creation of regional networks, and requiring pre-authorization for certain procedures.

California and New York were mentioned as states that had only initial success with reforms. "The depressed job market, skyrocketing prescription drug costs, and inadequate premium rates have pushed loss ratios upwards in California," the report says. "New York reforms addressed some of the problems in the state, but rate inadequacies and rising indemnity and medical severity have resulted in New York having the second highest loss ratio for two years in a row."

While Illinois, Michigan, and Montana have initiated major reforms recently, the report says most other states will not adopt many reforms at one time. "Insurance companies, therefore, cannot depend on every state to create a favorable underwriting environment for them. Insurers therefore must decide where to focus most of their business and how they can achieve a profit given challenging conditions."

Industry mix. Manufacturing, trade/transportation/utilities, and construction are noted as industries vital in the workers' comp composite, and have high premiums and high loss potential. The economic recovery will have varying impacts on each and, in turn, differing effects on the workers' comp system.

The authors expect frequency to increase overall, although less so in the construction industry "because jobs tend to have a more temporary nature and do not change much from one building to the next." However, it also notes that a recent shift from single-family to multi-family homes may "create a situation where workers will have to adapt to changing work projects more than usual."

Health care will likely have more of an impact on workers' comp and is projected to be the fastest growing industry in the nation. "While this industry is not known to have high severity, claim frequency has been much higher than for the industries in the workers' comp composite." The authors say that nursing homes, a key driver of frequency and severity, are expected to hire more workers as the population ages.

Expectations. The investment environment could lead to a hardening market, the report says, especially with interest rates projected to remain low. "Workers' compensation insurers that relied heavily on income from bonds will have a difficult time relying on investment income as they did in the past. This could result in continued pressure to achieve an underwriting profit in a line of business that has not had a combined ratio below 100 percent since 2006."

Medical costs, which are forecast to grow more slowly than they had been, could be impacted by a variety of factors. Wage inflation, an increase in Treasury yields, and a decrease in stock market returns "can push medical inflation upward." The new requirement for electronic medical records may push up medical costs because of the expense of implementing the systems and the increased risk of liability for physicians and hospitals.
The volatility in the workers' comp line means future profitability "will depend on how well the insurance companies can adapt to these changes and manage both the assets and liabilities on their balance sheets," the report says. "Cooperation with people in the medical community, the injured workers, and employers is essential for controlling the rising tide of loss costs."

Read more at the WorkersComp Forum homepage.

May 17, 2012

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