Excess Capacity To Impact Workers' Comp Outlook

A recurring theme in workers' comp for at least the last three years is the recognition that the market has a great deal of excess capacity.

Most analysts estimate excess capacity to be somewhere in the neighborhood of $50 billion-to-$100 billion. If you take out $20 billion for reserve deficiencies, youre left with approximately $30 billion-to-$80 billion in surplus.

A.M. Best in Oldwick, N.J., has also forecast that about one-third of p-c companies will fail or be consolidated by the end of 2003. Interestingly, the bottom quarter of providers represent some $70 billion in surplus–meaning that this group represents roughly the same amount of excess capacity that exists in the market.

If, as A.M. Best suggests, we are likely to have a significant failure rate, the question might be whether the high level of excess capacity will significantly diminish or even be eliminated, at least based on the estimates we have. Certainly, if the bottom quarter fail, leverage will increase across the industry, invested assets will fall, and the reported return on surplus may well rise.

Other key indicators to watch include:

Industry surplus: Will failure rates increase, and what will this do to surplus?

Loss Costs: How fast will medical inflation accelerate? Will frequency continue to decline?

Benefits: Will workers' comp benefit levels increase and reform rollbacks be legislated? What effect will the new American Medical Association guidelines have on loss costs?

Federal initiatives: What impacts will future new rules, such as those regarding privacy and ergonomics, have on workers comp?

Technology: What effects will business-to-business technology have on reducing costs and streamlining operations? How will customer relationships be transformed by new technology and new techniques for customization?

Apart from the significant changes promised in each of the above, the forecast for the future of workers' comp remains overcast. As noted above, the industry has excess capacity that is adversely impacting returns on surplus. At the same time, loss costs appear to be stable and many companies are achieving adequate returns despite overall industry outcomes that remain negative.

Weaker companies are going to face severe market pressures, and many may fail in the next few years. Only one thing is certain–interesting times lie ahead for workers' comp.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Excess Capacity To Impact Workers' Comp Outlook

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