forces affecting the workers' compensation market. We also offer stakeholders our thoughts on where the market will be headed in the next 12 months. As we prepare to deliver that much-anticipated report again this year, the early signs are of a market that is struggling against some significant headwinds. Two forces, in particular, continue to buffet the industry: A troubled job market and regulatory uncertainty.
It is important to note that 2011 marks the 100th anniversary of the workers' compensation system in America. That anniversary is not just a reason to celebrate. It also offers us the opportunity to be realistic about today's embattled market. While times are certainly difficult, we have seen such difficulties before, and we have successfully managed them. To be successful again today, we will need to learn from the experience of the past, to fully understand the market's condition, and to act cooperatively to protect the long-term interests of the workers' compensation system that we all work to support.
The first step—fully understanding the market's condition—starts with a look at economic forces.
Faltering Economic Recovery
Many economists have reported that the most recent recession was the worst in American history.
In fact, since June 2009—the reported end of the recession—the national unemployment rate has remained near or above 9 percent, and ranged as high as 9.8 percent. That's the longest period above that level since the Great Depression.
Given that the workers' compensation industry's underwriting performance is tied directly to the labor markets—and indirectly to the financial markets—the fallout has been significant.
In last year's State of the Line report, we noted that the collapse in private sector wages and salaries accounted for a workers' compensation premium decline of more than 23 percent over the past three years. We have also noted that the economic hit to the manufacturing and construction industries has caused an outsized impact on workers' compensation premium. From its peak in 2006, construction employment is down by more than 2 million workers—a decline of more than 27 percent. Since 2000, the manufacturing sector has lost more than 5.6 million jobs—a decline of about 33 percent.
Finally, small business hiring continues to lag. Keep in mind that small firms buy workers' compensation policies that tend to be full coverage (i.e., no deductibles) and, therefore, generate more workers' compensation premium per employee than larger firms. This has also had a negative effect on premium. Unfortunately, the outlook for a strong recovery during 2011 remains guarded.
From the perspective of the workers' compensation market, our view of the current market has actually worsened somewhat.
To make any significant reduction in the unemployment rate, the economy needs to continue to generate at least 200,000 jobs per month over the next couple of years. We have a long way to go to recover the 8.5 million jobs lost over the past few years. We anticipate only modest improvement, with ongoing weakness in construction and, to a lesser extent, manufacturing employment. This continues to be a largely "jobless" recovery. As such, the ongoing economic recovery is unlikely to generate a strong rebound in workers' compensation standard premium in the near future.
It is a troubling set of conditions. However, there are some early positive signs of recovery. Over the most recent months, employment and payrolls have stabilized somewhat, and we've seen some limited growth—especially in the high-premium manufacturing sector. Also, we think we are seeing a slowing of the precipitous drop in premiums.
In fact, some believe that 2010 marked a turning point—a transition year both for our economy and the workers' compensation industry—though we've seen too many false alarms to embrace "recovery" just yet. Regulatory Uncertainty
Apart from the economy, the other issue that is always at the very top of our watch list is the current state of government regulation.
When the Democrats were swept into national office in 2010, many felt that our industry would see sweeping calls for reform. And we did get a major health care law. However, the economic recession cast such a large shadow over other agenda items—particularly at the state level—that the changes for our industry were not as great as anticipated.
Last fall, we had another major political shift. Republicans enjoyed a banner year, and we now have an entirely new group of leaders with new priorities. Obviously, the new Republican majority in the House of Representatives—along with a stronger minority in the Senate—has resulted in much more talk about fiscal austerity, cutting the budget, and reducing the regulatory and taxation burdens on business. It will be interesting to watch those debates move forward in the coming months.
On health care, our industry saw only minor direct impact from the president's new law, particularly in the specific area of Black Lung disease. With the law now under assault in various federal courts and with the expectation that it will have to be reviewed by the Supreme Court, we do not anticipate any near-term further effect for workers' compensation. Where we might see some real industry effect over the coming months, however, is from the implementation of the new financial reform law. In March, Treasury Secretary Timothy Geithner announced the appointment of Illinois Insurance Director Michael McRaith to the position of director of the Federal Insurance Office (FIO). The expectation is that he will join the office in June.
Also, we are currently awaiting the presidential appointment of an insurance representative to the Financial Stability Oversight Council. It will be interesting to see what effect and energy—if any—these newly appointed leaders will bring to the insurance industry in the coming months.
FIO must report to Congress in January 2012 on the state regulatory system. Among the questions to be considered will be the costs and benefits of enacting federal oversight of insurance—perhaps via the creation of an optional federal charter. To complete its analysis, FIO has the authority to demand data from the industry to produce a series of studies mandated under the law. It could potentially compel carriers to produce data if the information needed is not accessible otherwise—an option that might place a greater strain on insurer operations. Any additional call for data, resources, or new expenses is a concern, and all industry stakeholders will need to monitor this situation closely.
Just like at the federal level, 2010 was a "message" election year at the state level, with Republicans once again the big winners. Across the country, Republicans picked up six governor slots and almost 700 legislative seats. New majorities have emboldened Republicans to drive workers' compensation reform efforts in states such as Kansas, Illinois, Maine, Montana, North Carolina, and Oklahoma. In two states with Democratic control—Connecticut and Hawaii—we've seen the introduction of measures aimed at expanding benefits. The long-term success or failure of these efforts remains to be seen, but we anticipate some increased legislative activity at the state level in 2011. Looking forward, the new majorities may also have a long-term effect. State redistricting takes place beginning in 2011, and Republicans will now have a decided advantage in shaping state legislative and Congressional districts.
Other Significant Trends
Given the difficult set of market conditions described above, the question arises: What are some of the steps we can take as an industry to encourage healthier workplaces?
Apart from promoting more traditional safe-workplace programs and rules, many are turning to programs to encourage wellness and reduce obesity. As employees begin to embrace the concept of responsibility for their own health and are better educated about existing risks, it will be interesting to see if we do not witness a corresponding improvement in reported workplace safety.
Directly related to the concept of wellness is the issue of obesity. Several organizations, including NCCI, have taken a long look at obesity and started to document the fact that heavier workers are more likely to suffer severe workplace injuries.
In 1990, among states participating in a survey conducted by the Centers for Disease Control, 10 had a prevalence of obesity less than 10 percent, and no states had prevalence equal to or greater than 15 percent. By 2009, only one state (Colorado) and the District of Columbia had a prevalence of obesity less than 20 percent. Thirty-three states had a prevalence equal to or greater than 25 percent, and nine of these had a prevalence of obesity equal to or greater than 30 percent. What does that mean for workers' compensation? NCCI's research shows that medical costs for obese claims at 36 months were four times more costly and, by 60 months, more than five times greater. These are staggering numbers.
Obviously, the twin issues of encouraging wellness and addressing worker obesity will garner a significant amount of industry attention in the years to come.
Looking Forward
To sum up, as the market looks out over the weeks and months to come, we continue to face a series of challenging forces, including:
- Economic recovery remains elusive
- Job growth still lags
- A new set of elected officials at the state and federal levels with new priorities.
At the same time, there are some initial (albeit small) signals of a turnaround:
- Some economic growth/jobs recorded lately
- Premium drop slowing
Like many other industries in America, we stand at a crossroads awaiting an economic recovery. However, for now—and for the foreseeable future—this remains a very difficult market.
Given that, I think it's important to again note that 2011 marks the 100th year of workers' compensation insurance in America. In other words, we have seen difficult times before (remember the pre-reform results of the early 1990s, or the setbacks we encountered after 9/11?).
To continue to operate efficiently, our system requires that independent stakeholders such as NCCI work closely to inform all parties about current conditions; it requires regulators to ensure that rates remain reasonable; it requires carriers to fully understand market conditions so that effective business—and industry—decisions can be made; and it requires other participants to work cooperatively to educate public officials and industry leaders about the best ways that our market can respond to difficult conditions.
To a large extent, this process will begin in early May, when NCCI presents its State of the Line report at the Annual Issues Symposium in Orlando. The report will offer the latest detailed economic analysis of the market, a review of the forces most likely to impact us—both positive and negative—in the months to come, and our feeling about where we are headed in the next several months.
Traditionally, the State of the Line report sets the market tone and offers the detailed analysis that market stakeholders will require in the weeks to come. The full report and associated press release will be posted on May 5 and available for downloading at no charge on ncci.com. We invite you to view and study that analysis for a full picture of market conditions.
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