Workers' Compensation is one of the most important markers to follow for anyone looking to get a sense of where the larger commercial P&C world is heading. And this year, experts are seeing worsening pricing, increasing claims severity and an improving claims frequency, all against a backdrop of regulatory uncertainty exemplified by the unpredictable aftermath of the Affordable Care Act's implementation. It all adds up to a market that, for the year to come, seems to offer at least as many challenges as opportunities.

Pricing in Workers' Compensation has continued to climb this year, but not at the overall rates it saw in 2012 and 2013. While growth varies by segment and account size, the industry is seeing overall increases from 2%-5%, says Debbie Michel, president of Helmsman Management Services.

Mark Wilhem, CEO at Safety National, notes that excess market pricing has been trending upward in recent years, which is a welcome offset to investment income that simply hasn't been what it used to be for some time now.

Meanwhile, Eric Silverstein, senior vice president and risk management leader at Lockton, notes that pricing in the small-account sector has tracked with rate changes in the states where those accounts do business. The mid-market has seen additional increases of 3%-4% for each of the past four years. The large account sector is more complex, he adds, where “companies with strong financials, in preferred classes of businesses, and having the right mix of states where they do business, are in extremely high demand and have continued to find a competitive rate environment.”

THAT SOFTENING FEELING

Silverstein predicts that things are about to change, however, as a trend toward rate decreases may be taking hold on a state-by-state basis. Recently, Illinois announced that Workers' Compensation rates have dropped nearly 20 points in the last three years. In Florida, the state reported in August that employers could see the first overall reduction in WC insurance rates in four years after the National Council on Compensation Insurance proposed a 2.5% decrease. In total, there are now 22 states that either have pending rate decreases or have filed rate decreases, says Silverstein. These states are likely to influence others, which may feel pressure to adjust rates as well. This is no trivial bellwether, as Workers' Compensation has underperformed in terms of loss ratio in recent years. Further rate decreases will only soften the market more, and drive up combined loss ratios.

OBESITY, AGE AND MEDICAL COSTS

In terms of frequency, the claims picture for this line has been improving, thanks in part to manufacturing leaving the U.S. and a trend toward more of a service-based economy. Technology and automation have also created less dangerous and strenuous environments, Michel says.

Severity, on the other, hand, has been increasing. Obesity plays a large factor, which Michel insists drives up claims costs. Some 30% of the U.S. workforce is obese, and that is swiftly rising to 40%. “Obesity is an epidemic that is real and critical for the workforce because when we look at Workers' Compensation costs, they are at least 5% higher for an obese person due to more lost time as well as higher medical costs,” she says.

Another factor is an aging workforce that takes longer to recover from injuries and illness—and that sometimes does not recover at all. Some 20% of the workforce is currently 55 years old or older, and that will climb to 25% by 2020. Claims severity for this demographic is about 150% higher for older workers than for younger ones, Michel says.

A third rail is an anticipated 6% increase in medical costs over the next year, fueled by higher demand for medical services. It is a vicious cycle: more severe claims lead to higher medical costs, which in part, lead to more severe claims.

Insurers are also concerned with new exposures, including medical marijuana. “We are running into the issue of workers being injured and found to be under the influence. In many states that gives you deniability for the claim, but it is still an issue,” Wilhelm says. “Layer on top of that the whole issue with narcotic pain medications and the addictions they can cause, and it exacerbates the problem.”

While it is still too early to predict precisely how the Affordable Care Act will impact larger Workers' Compensation trends, the ACA looms large on this market's horizon, Michel says. Will other states follow Oklahoma and Texas in offering “opt out” provisions? Will the ACA drive down costs of care and improve overall health, or drive up costs due to increased use? Will greater access to health care reduce the likelihood that workers will claim non-work injuries against Workers' Compensation forms? Or will a shift toward more part-time and no health benefits push uninsured employees to file claims? These are just a few considerations, and they add up to a distinct lack of certainty for projecting this market's cost trends in the foreseeable future.

SO…WHO REALLY BENEFITS?

With increased severity and a push from states for lower rates, it might seem that capacity would become an issue in the market. However, as in other sectors of commercial insurance, the Workers' Compensation market has ample capacity and observers expect that to continue. Capital continues to flow into the market from pension funds and other sources, Silverstein says. That means that reinsurers in this space are bound to become more aggressive, resulting in more competition. So far, that has led to a race to the bottom, in terms of rates, so while carriers struggle for dominance in this market, the real victors, at least for now, appear to be to policyholders.

Special Reports /

Workers' Comp: (Not So) Great Expectations

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