Orlando

The ongoing recession has hit workers' compensation carriershard, causing nearly a quarter of the market's premiums toevaporate and cutting profitability by as much as half in the pasttwo years, experts in the field reported here.

“Profitability in workers' compensation is heading downhillrather rapidly,” according to Robert P. Hartwig, president of theInsurance Information Institute. “We are earning about 40-to-50percent less than we were pre-crisis,” he added, referring to thefinancial meltdown caused by the collapse of the housingmarket.

Mr. Hartwig and two fellow panelists reported on the state ofthe market here as part of the National Trends program put onannually by National Underwriter during the recentWorkers' Compensation Educational Conference.

Mr. Hartwig noted that the demand for workers' comp coverage hasdropped dramatically as unemployment has soared over the past twoyears.

“Nationwide, we lost about 8.4 million jobs from December 2007through December 2009,” he noted. “The recession caused the largestimpact on workers' compensation exposure in 60 years.”

Indeed, Jeff Eddinger, rate-making practice leader and senioractuary for NCCI Holdings Inc., reported that “in the last twoyears, workers' compensation has lost 23 percent of itspremium.”

Mr. Hartwig noted that high-exposure industries such asconstruction and manufacturing have been hardest hit in thisrecession, draining a lot of workers' comp premium from themarket.

In addition, small businesses–which typically buy full coveragefor workers' comp as opposed to larger firms, which often carryhigh-deductible programs–are going bankrupt in record numbers,while start-ups are stymied by the credit crunch.

However, according to Mr. Eddinger, the dramatic drop inworkers' comp premiums is “not all due to the recession,” ascontinuing declines in accident frequency and a competitive markethave also driven prices down.

“NCCI and other rating bureaus have lowered rates and loss costsby 7 percent,” he noted. “Also, carriers dropped pricing by 4percent. That accounts for about half of the drop.”

Mr. Eddinger also has a ready answer for employers who stillcomplain about high insurance costs. “The cost of workers'compensation as it relates to total employer cost has come down inthe decade 1999-2009,” he said. “It now stands at 1.6 percent, downfrom 1.4 percent.”

Addressing looming issues, Gary Hinson, vice president of ACECOMPlete workers' comp claims, warned that the patchwork of statelaws regarding the medical use of marijuana will have a significantimpact in the workers' comp arena. “The statutes are fairly looseregarding when it can be prescribed, and there is no guidance onwhether this should be paid for in a workers' compensation claim ornot,” he said.

“Some states allow you to grow your own,” he added. “So, if yougrow your own, do I pay you for that? What is the fee schedule inthat instance? If you have someone who works with hazardousmachinery, and the guy is medically using marijuana, what do youdo? Is that person entitled to keep his job? These are real issuesand we will be dealing with them in the next couple of years.”

The panelists did offer some positive news across variousfronts.

Mr. Eddinger reported that in residual market pools serviced byNCCI, premium volume has fallen from its peak in the early 1990s–ahealthy sign. In 2009, it accounted for some $500 million inpremium–only about 5 percent of the total market.

Mr. Eddinger also said that he is “seeing a little bit of aslowdown in both indemnity and medical costs per claim. We used tosee double-digit growth, and we are seeing some mitigation in thelast couple of years.”

All noted the continuing decrease in claims frequency.

In terms of potential hot spots with job growth, Mr. Hartwigpredicted that Texas, the Plains States and agricultural states“will be doing quite well in the near future. However, states tiedto construction will continue to have a hard time.”

He also sees huge potential for additional jobs and payrollwithin the health care industry, which may be a challenge for someworkers' comp carriers who have tended to shy away from thismarket.

“Many insurers have steered away from these risks, such asnursing homes, in the past, because of their relatively highexposures,” noted Mr. Hartwig.

“However, we are going to see major transformational shifts inthis country,” he added. “About four million jobs will be createdin the health care business through 2018. Many of these jobs arerelatively well-paying, with a lot of workers' comp exposure to behad. If you are not taking a stake in this business, you are goingto be missing the big boat.”

On a final positive note, Mr. Hartwig predicted that whileeconomic recovery will be slow, “the reality is I do not think weare going to have a double-dip recession.”

“Although it will take several more years for the country to getback to an unemployment rate of 5 percent, we will see small growththis year and next year,” he said. “We have seen private sector jobgrowth every month in 2010, and that is good news for the workers'compensation market. As bad as things feel today, they are much,much better than they were 18 months ago.”

Joan Collier is Editor of FloridaUnderwriter, part of Summit Business Media's P&C InsuranceGroup, which includes National Underwriter.