Report: Workers' Comp Insurers May Be Pressured Into a Hard Market

NU Online News Service, April 26, 1:00 p.m. EDT

With the current investment environment working against workers’ compensation insurers, companies may be pressured into a harder market as they try to achieve underwriting profits in a line that has not had a combined ratio under 100 since 2006, a new report says.

Conning Research & Consulting says in its “Workers’ Compensation: A Bumpy Road from Recession to Recovery” report that workers’ compensation specialists have tended to invest a higher portion of their assets in bonds since 2008.

But with with “extremely low interest rates” projected for 2012 and even beyond, Conning says insurers that “relied heavily on income from bonds will have a difficult time relying on investment income as they did in the past.” As such, Conning says insurers may be pushed into a harder market seeking profits from underwriting.

Even if interest rates rise, the benefit in improved investment returns may be tempered by the corresponding possibility of higher inflation. “Historical results have shown that medical inflation often moves in the same direction as general inflation,” Conning says. Rising medical costs would increase workers’ compensation loss costs.

These double-edged-sword scenarios pop up in other areas with respect to workers’ compensation as well. 

For example, the Conning report notes that some companies such as The Hartford have reported significant workers’ comp reserve increases in 2011. While reserve strengthening could lead to a hardening market as it has in the past, it also negatively impacts profitability and could be a threat in other ways, such as increased scrutiny from regulators and lack of confidence from shareholders and stakeholders.

Additionally, an economic recovery that leads to job creation would benefit workers’ comp insurers by increasing payrolls and therefore premiums. But Conning notes that overall claim frequency is also expected to increase with an economic recovery because an influx of workers will be learning new jobs, particularly in the manufacturing and trade/transportation/utilities sectors.

“Because new workers often are earning much lower wages than experienced workers, there is a potential mismatch of risk and exposure in these sectors,” Conning says.

With premium and loss volatility, medical inflation and rising loss costs, Conning says states have implemented reforms in recent years with “varying levels of success.” 

Florida and Texas, the report says, have been effective at keeping insurers profitable. Florida focused on reducing legal fees while Texas addressed medical costs through provisions such as requiring an approved list of certified doctors to provide care to claimants and requiring pre-authorization for some procedures. 

California, which had early success with reforms, has seen a depressed job market, higher prescription-drug costs and inadequate premiums drive loss ratios upward, Conning says. And New York is still suffering from rate inadequacies despite approving a 9.1 percent increase in October 2011 and a 7.7 percent increase the year before. 

Conning notes that other states have pursued rate increases as well, but adds that implementing these during an economic recovery is difficult.

Ultimately, Conning says future profitability in this line will depend on insurers’ ability to adapt to changes during the recovery, and on cooperation between all stakeholders: the medical community, injured workers and employers.

“State governments and insurance department will also need to lead the way,” says Conning. “Hopefully, the lessons learned from successful reforms in states such as Texas and Florida will play a role in fixing the workers’ compensation industry for the future.”


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