"Profitability in workers' compensation is heading downhill rather rapidly," according to Robert P. Hartwig, Ph.D., CPCU, president and economist of the Insurance Information Institute. "We are earning about 40-50 percent less than we were pre-crisis."
Hartwig and his fellow panelists — Gary Hinson, vice president of ACE USA Claims, and Jeff Eddinger, FCAS, MAAA, practice leader and senior actuary for NCCI Holdings, Inc. — reported on the health of the workers' compensation market at the Florida Workers' Compensation Institute's annual Workers' Compensation Educational Conference on Tuesday at a session entitled, "Annual Checkup: What Is the State of the Workers' Compensation Market?" The discussion was moderated by Sam Friedman, group editor-in-chief of National Underwriter, P&C.
Hartwig noted that the demand for commercial insurance has dropped as unemployment has risen. "Nationwide, we lost about 8.4 million jobs from December 2007 through December 2009," he said. "The recession caused the largest impact on workers' compensation exposure in 60 years."
"In the last two years, workers' compensation has lost 23 percent of its premium," Eddinger agreed. "But that's not all due to the recession. NCCI and other rating bureaus have lowered rates and loss costs by seven percent. Also, carriers dropped pricing by four percent. That accounts for about half of the drop."
To employers who still complain about high costs, Eddinger has a ready answer. "The cost of workers' compensation as it relates to total employer cost has come down in the decade 1999-2009," he said. "It now stands at 1.6 percent, down from 1.4 percent."
The panelists also addressed regulatory issues, with Hinson noting that it has been "a quiet year for state legislation as lawmakers focused on the economy." He said that Oklahoma was the only state to pass reform bills that significantly changed the workers' compensation system. "Colorado passed some bills, but they were not major reforms," he said. "Other states passed bills limited in scope or focused on discrete areas of political interest."
Hinson warned that the patchwork of state laws regarding the medical use of marijuana will have a significant impact in the workers' compensation arena. "The statutes are fairly loose regarding when it can be prescribed, and there is no guidance on whether this should be paid for in a workers' compensation claim or not," he said. "Some states allow you to grow your own. So, if you grow your own, do I pay you for that? What is the fee schedule in that instance? If you have someone who works with hazardous machinery, and the guy is medically using marijuana, what do you do? Is that person entitled to keep his job? These are real issues and we will be dealing with them in the next couple of years."
What about Impacts from Health Care Reform?
On the federal level, the massive health-care reform bill looms large. Eddinger said that while there are some "knowns" — for example, changes in the Federal Black Lung Benefit entitlement provisions and Medicare reimbursements levels will cause a rise in benefits and/or number of beneficiaries — the rest of the Patient Protection and Affordable Care Act is unchartered territory and its impact on workers' compensation is yet to be revealed.
The panelists did offer some positive news across various fronts.
Eddinger reported that in residual market pools serviced by NCCI premium volume has fallen from its peak in the early 1990s, a healthy sign. In 2009, it accounted for some $500 million in premium, about 5 percent of the total market. Eddinger also said that he is "seeing a little bit of a slowdown in both indemnity and medical costs per claim. We used to see double digit growth, and we are seeing some mitigation in the last couple of years."
All noted the decrease in claim frequency.
On the jobs front, Hartwig predicted that Texas, the Plains States, and agricultural states "will be doing quite well in the near future. However, states tied to construction will continue to have a hard time."
He also sees huge potential for jobs and payroll within the health-care industry. "Many insurers have steered away from these risks (such as nursing homes) in the past," Hartwig said. "However, we are going to see major transformational shifts in this country. About 4 million jobs will be created in the health-care business through 2018. Many of these jobs are relatively well paid, with a lot of workers' compensation exposure to be had. If you are not taking a stake in this business, you are going to be missing the big boat."
On a final positive note, Hartwig said, "The reality is I do not think we are going to have a double-dip recession. Although it will take several more years for the country to get back to an unemployment rate of five percent, we will see small growth this year and next year. We have seen private sector job growth 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."
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