While there are many positive developments and encouraging trends for workers’ compensation insurance buyers and sellers to celebrate, there are also numerous threats on the near horizon that could undermine efforts to keep injury frequency and the cost of risk under control, one leading executive warns.
Neal S. Wolin, president and chief operating officer for property and casualty operations at The Hartford Financial Services Group, will share his take on the state of the market during his keynote address this week at the annual Workers’ Compensation Educational Conference in Orlando.
But before he kicked off the WCEC’s National Trends program–put together each year by National Underwriter–with his speech, he sat down for a Q&A about the most pressing issues confronting the workers’ comp market.
Q: How do you characterize the state of the workers’ comp market today?
Overall, I’d say that the workers’ comp market remains stable–for the time being. We’ve seen very strong profitability over the past few years.
Frequency has continued to decline, and while medical and indemnity costs have continued to grow, the growth rates appear at least to have leveled off–helped perhaps by some of the reforms that went into effect in recent years in some states.
That said, there are certainly reasons to believe we’ll face more challenging times ahead. Prices are softening, and we anticipate another year of rate decreases in key states. Factoring in the effects of the economic downturn, the industry will probably see negative premium growth again in 2008.
We’re hopeful premium will flatten out and begin to rise in 2009, but whether that happens could depend on the depth of the downturn. Considering the importance of investment returns to workers’ comp profitability, the current market turmoil is cause for concern, as well.
So I’d say I’m cautiously–very cautiously–optimistic. But, especially given the long-tail nature of the workers’ comp line, it’s absolutely critical that carriers remain disciplined over the coming years.
Q: What are the positive and negative trends in frequency and severity we should watch?
The frequency trends remain very good. Lost-time claims frequency has continued to drop steadily. Interestingly, those states that enacted dramatic reforms, like California, have seen unprecedented–and also unanticipated–decreases in frequency.
Severity increases have been relatively modest over the past several years, compared to the double-digit increases of the late 1990s and early 2000s. Year-over-year indemnity severity increases have held in the mid-single-digits, while medical severity increases have been in the mid-to-high-single-digits.
Of course, that still puts workers’ comp medical severity growth well above the medical Consumer Price Index and the overall inflation rate. Medical severity is linked to a large extent to utilization rates and to hospital charges–for which most states don’t have fee schedules or other cost-containment mechanisms.
Indemnity severity has been controlled by efforts to facilitate return-to-work partnerships between employers, doctors and injured workers, helping workers to identify transitional opportunities. In addition, the increasing focus on impairment accuracy–particularly for permanency awards–has been important.
Q: How has the economic downturn affected workers’ comp? Is there a greater risk of frequency rising after layoffs? Should we be on the lookout for more widespread fraud?
Those are questions we’ve been asking ourselves, and we’re on the lookout for any indications fraudulent claims are spiking due to the downturn. We haven’t seen any such indications yet.
Interestingly, if you look back through the historical data, frequency has tended to drop–not spike–during periods of economic downturn. There are lots of reasons one might propose to explain that, but the causality is really anyone’s guess.
That said, the economic downturn does have the potential to hit the workers’ comp market on a number of fronts.
First, payroll growth is likely to be constrained, putting additional pressure on premiums. Second, investment income will undoubtedly take a hit–which puts substantial pressure on profitability.
Third, there’s the possibility that, as economic pressures mount, employers will be increasingly attracted to large deductibles and self-insurance. That’s something we’ve begun to see.
Frequency has been dropping over the years because of sound risk management and safety programs taking hold. Have we reached the point of diminishing returns? Is there any danger that with companies cutting expenses in a down economy, loss control budgets could take a hit, jeopardizing the gains we’ve achieved in frequency?
It’s possible that we have, in fact, reached a point of maturation with respect to the risk management practices and safety programs that have helped drive down frequency over the past decade. But we’re also seeing more widespread adoption of employee health and wellness programs, which may prove to be the next generation of defenses against frequency and severity.
It’s also important to note that, as the composition of the workforce changes–particularly with older employees representing a larger percentage of the workforce–we need to constantly revisit and possibly revise the risk management practices already in place.
We’re taking this issue very seriously–working internally and in partnership with the MIT Age Lab to better understand the risks that may be unique to an older workforce.
Regarding the risk that companies will cut risk management budgets, my guess–and certainly my hope–is that it’s unlikely to be a significant problem. For large employers, with large payrolls and substantial exposure, the returns on workplace safety programs are just too obvious.
It’s possible that smaller insureds, with fewer workers and less overall exposure, might be tempted to cut corners to keep expenses down. But again, my hope is that reduction in risk management practices won’t be a significant problem overall.
Q: Rising medical care cost growth, particularly for drugs, has been daunting. What progress are we seeing in tackling this, and what more can be done?
We’ve seen tremendous progress in controlling prescription drug costs through formularies and by encouraging the use of generics. Nonetheless, while drug costs have held flat, utilization has been an increasingly important cost driver.
There’s still a great deal more that can be done to control pharmacy costs, including the expansion of drug utilization reviews, formularies that limit automated approvals, and efforts to control the long-term use of narcotic pain medications–which remains the most commonly prescribed class.
Carriers also face a talent challenge. For many years, indemnity expertise was the “in demand” skill set. Today, there’s a great need for medical expertise in claims departments. As that need is addressed, and carriers become more sophisticated in their management of pharmacy benefits, I think we’ll continue to see progress.
Physician costs have been increasing relatively modestly, as a result of various cost-containment methods such as case management, utilization review, medical networks, physician peer review, fee schedules, etc.
Again, though, hospital costs have been growing at troubling rates and are the least controlled element of medical costs. That’s an area where I hope states will begin to focus their attention.
Q: A number of major states have reformed their workers’ comp systems. How has that worked out, and what “hot spots” do we still need to address?
In Florida and California, where the reforms have had some time to operate, the results are very positive. Those states have seen reduction in premiums, drops in out-of-control severity costs–chiropractic costs in California and outpatient hospital costs in Florida–as well as less uncertainty and fear in the claim-handling environment and more equitable pay for injured workers.
In addition, moving to an American Medical Association-based schedule for determining impairment under the permanent-partial disability portion of the benefit structure has brought greater objectivity and consistency to indemnity costs. Overall, loss costs and premiums have both been reduced substantially in those states that have enacted significant reforms.
Some reforms have added unnecessary complexity–for example, the complex fee schedule in Illinois. But for the most part, the reforms have had the right intent and outcome–managing medical cost inflation, lowering premiums, and increasing weekly benefits to higher wage injured workers.
The “hot spots” across the country all face the same kind of issues–addressing rising medical costs through fair and effective fee schedules, and addressing medical services through fair and effective utilization management.
North Carolina and South Carolina are of particular interest, where legislators continue to debate significant reforms–particularly the value of fee schedules and AMA-based guidelines.
Q: What excites you most about the workers’ comp market, and what troubles you the most?
I think we should all be heartened by the reforms in states like California, Florida and even New York. As an industry, we’ve largely succeeded in raising awareness among state legislatures and insurance departments of the importance of workers’ comp and the potential for improvement that benefits all parties–carriers, employers and workers alike.
It’s exciting to see the growing consensus regarding the need to have a healthy workers’ comp system. I hope we’ll see more reforms like the ones we’ve talked about. It’s also hard not to be excited about the continuing declines in frequency.
I remain troubled by rising hospital and pharmaceutical costs, driven primarily by utilization rates. Like everyone, I remain anxious about the effects of demographic changes in the workforce–the aging of the workforce, as well as the troublingly high rates of obesity.
And, of course, I remain troubled by the potential that profitability will be pressed from two directions, with premiums and investment income declining on the one hand, and severity continuing to increase–even at more modest and more stable rates–on the other.
More generally, it seems to me that we’re facing a larger challenge as workers’ comp costs may be increasingly related to “conditions” as opposed to discreet “injuries.” The lines between workers’ comp and typical health coverage may be getting somewhat less clear, with chronic secondary conditions such as diabetes and obesity blurring the lines.
Q: What emerging issues or challenges might surprise the market?
There are quite a few emerging issues and challenges. As we’ve talked about, the aging of the workforce and also the increasing rates of obesity, diabetes, etc., are all challenges that may end up affecting frequency and certainly severity trends. Also, a great deal depends on how the current economic downturn plays itself out.
Perhaps the greatest challenge is simply for all carriers to remain extremely disciplined, despite the recent profitability and top-line pressures we’re all likely to feel. If carriers begin to lose sight of the long term and start irresponsibly playing for market share, we could face a very dangerous pricing environment.
And, of course, there are lots of issues out there on the public policy front. One question is whether the reforms that have proven so effective in recent years will continue to be adopted by other states.
Another issue is how permanent-partial disability is determined. There’s some controversy concerning the release of the latest edition of the AMA Guides to the Evaluation of Permanent Impairment. Several states have put the new standard on hold pending further evaluation.
On a much larger scale, there’s the question of how Congress and the presidential candidates will approach health care reform. So far, we haven’t seen any indications that either candidate is interested in merging the workers’ comp system into a universal health insurance system, as was proposed back in 1993.
But there’s clearly some momentum behind health care reform, and it remains to be seen how that will affect workers’ comp.