"There are four types of men:
1. One who knows and knows that he knows... His horse of wisdom will reach the skies.
2. One who knows, but doesn't know that he knows... He is fast asleep, so you should wake him up!
3. One who doesn't know, but knows that he doesn't know... His limping mule will eventually get him home.
4. One who doesn't know, and doesn't know that he doesn't know... He will be eternally lost in his hopeless oblivion!"
-Ibn Yami, 13th-century Persian-Tajik poet
It has often been said that knowledge is the highest form of condescension. In the property/casualty insurance sector, data is endlessly acquired in order to construct a platform for analytics, thus providing greater insight into myriad areas of risk. This avalanche of data, and its interpretation, is meant to supply knowledge so that better decisions can be made in terms of underwriting risks.
Unfortunately, knowledge does not equate to wisdom. Knowing a set of facts doesn't necessarily insure that a correct business decision will be rendered when attempting to interpret those facts. Workers' compensation insurance is an example of this postulation.
Workers' comp is the most highly regulated line of P/C insurance in the country. The data that is amassed on an annual basis continues to expand. The information is utilized by insurance carriers to come to conclusions about how better to manage risk, and ostensibly how to make a profit in this line of business. If the data was always interpreted correctly, proper strategic and tactical decisions would result, and net profits should be in evidence on a continuing basis. However, that is not the reality. Statistics reveal that the workers' comp line has only had three years of a combined ratio under 100 percent in the last two decades, and 2012 looks as though it will exhibit a 119 percent combined loss ratio. So has the data knowledge been properly translated into correct business decisions?
On the claims side, the industry has witnessed loss costs flip between indemnity and medical over the same period, to where the latter is now the primary cost driver. The stampede to contain medical costs hasn't really been effective. Many programs still concentrate on retrospective review of treatment and bills, while prospective programs (utilization review) are often constructed in an adversarial manner, thus inducing the very evolution the program seeks to avoid; alienating the treating physician. Claims about the success of cost containment (for example: restricting an increase in medical expenses to 7 percent instead of 10 percent) remain dubious at best. Is this illustrative of the application of true wisdom after parsing the data?
From a statistical standpoint, the workers' comp area is in a spiraling decline in terms of profits. Are the vicissitudes of the industry due to a scarcity of critical data, or a dearth of proper decision making at the strategic level? Is it a combination of both? Or perhaps is wisdom missing, ignored or unapplied resulting in financial losses on a continuing basis?
Anyone who has been around this industry will have a difficult time claiming that there is a lack of data. The workers' comp arena has a virtual tsunami of information available from independent rating bureaus, the NCCI, ISO, NASI, etc. While it is true that some of the information is probably inaccurate (the "garbage in, garbage out" theory), certainly that is not the case in the vast majority of instances. Historical loss data is available down to class code within state, and by risk. So I do not think that there is a signal lack of meaningful claims and underwriting data that pejoratively impacts trenchant analysis.
So if there is not a dearth of data, what is the reason that the workers' comp line continues to largely be a money hole on an industry wide basis? Is the data ignored? Is there a conscious strategy to allow workers' comp to be a loss leader to gain other lines of profitable business? Is the proper attention to ultimate profitability of underwriting objectives simply not in the forefront of decision making?
Obviously, the answers must be evaluated on a company-by-company basis. History has proven that underwriting/pricing discipline is paramount when involved in the workers' comp area. A claims department with vitality and a sense of how to properly engage people to reduce exposure/costs is also a key component of success. Loss prevention is another salient ingredient in a successful workers' comp book. The way these different departments (often called "silos") interact is also critically important.
A root cause analysis (anything but a simple task) on an insurer-by-insurer basis will ineluctably yield numerous issues. Of these, an elemental problem may be one of simply failing to properly interpret the data elements leading to decisions that result in a lack of profits.
The first order of business may be to determine what is known, and what is unknown, so the gap can be closed. However, if an intellectually rigorous analysis is not applied, a company may be in the purgatory of not knowing what they do not know. In other words, a state of unconscious incompetence exists. By facing what they do not know, individuals and organizations move from unconscious incompetence to conscious incompetence. From there the transition is to conscious competence, and finally unconscious competence (knowing the correct decision to make without thinking about it).
To ignore reality will not change it. To blame the legal environment for workers' comp woes deflects meaningful self-examination. In the realm of workers' comp, ignorance is not bliss. It merely means that pursuing underwriting risks in the workers' comp arena in the same manner will continue to exhibit the same result, which over the last two decades has been less than salutary. If losing money in the workers' comp line is not a clarion call to reexamine the information you possess, the processes and the type of strategic decisions that have been made in the past, I don't know what is.
May the spoils go the companies who take the time and effort to understand their internal situation, and make the needed changes!
October 11, 2012
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