Workers’ Comp - Positive Results While Facing a "Transforming" Landscape
Solid financials and continued profitability made 2015 another positive year for the Workers’ Compensation industry. This was the message delivered at the 2016 NCCI Annual Issues Symposium. Trending favorably for the past several years, the results include continued combined ratio improvement, increased premium growth and a further decline in claim frequency.
The theme of this year's AIS, "Channeling Change: Meeting the Challenges of an Evolving Market," was carried through the entire conference. While industry stakeholders should welcome the positive financial results, change is coming, and continued diligence is required to ensure that a strong and competitive system endures. New NCCI President and CEO Bill Donnell provided this year's descriptive phrase for the current state of Workers' Compensation: "Transforming." In addition to challenging regulatory and low interest rate environments, Mr. Donnell mentioned the significant transformation that NCCI sees on the horizon, citing new monitoring technology, expanded automation, and evolving innovation in how employees work as examples.
NCCI CEO Overview
Having taken over as President and CEO of NCCI from Steve Klingel in January, Bill Donnell opened up the 2016 AIS by reaffirming NCCI's commitment to achieving adequacy of loss costs and rates while providing timely, high-quality and relevant data.
After touching briefly on the positive results of 2015 (see State of the Line below), Mr. Donnell focused on the longer-term trends for Workers' Compensation, specifically with regard to recent criticism from the media and government officials questioning whether the "Grand Bargain" was still valid. Noting that "the frequency and potential severity of system challenges are creating levels of uncertainty as we move forward," Mr. Donnell stressed the need for everyone to understand the success that the Workers' Compensation system has had, how it works and the benefit it provides.
While pointing out that Workers' Compensation-related risk management and safety programs were responsible for long-term reduction of work-related injuries, Mr. Donnell highlighted two employers (Iron Mountain and Harley Davidson) as examples of success stories in which workplace safety is a priority and injured employees are returned to work safely and quickly.
Mr. Donnell did not downplay any incidents that have led to criticism and called for the need to address any individual failing. Noting that these few incidents do not define the entire Workers’ Compensation system, he also called for industry personnel to share their own success stories and in general to become more responsive as a means to overcome such criticism. To this end, Mr. Donnell’s recommendations for all Workers’ Compensation stakeholders include:
- Address challenges to Workers' Compensation in a collaborative manner. Seek to educate legislators responsible for making key decisions about the Workers' Compensation system, lest adverse actions go unabated. Anecdotal information should be supported by facts before a long-term successful public/private partnership is targeted for erosion.
- Communicate a broader understanding of the intent and value proposition of Workers' Compensation, including how the system is set up for the treatment of injured workers and their return to work.
- Adapt and measure the industry's progress in responding to how the evolving economy works to ensure that Workers' Compensation continues to meet the needs of the workforce.
Mr. Donnell also further elaborated on the "transforming" nature of the market - one in which there is an increased recognition of the importance of underwriting in an ongoing low interest rate environment.
NCCI State of the Line
The State of the Line report was presented by Kathy Antonello, Chief Actuary for NCCI. This report provides a detailed review of trends and cost drivers in the Workers' Compensation industry. While 2015 data is preliminary, here are some of the highlights from Ms. Antonello's presentation:
- WC Premium - Net written premium for private carriers increased 2.9% to $39.7 billion in 2015 - the fifth consecutive year of growth. The total market net written premium volume of $45.5 billion is approaching the pre-recession peak of $47.8 billion in 2005. The total P&C industry increase was 3.3%.
- WC Combined Ratio - The calendar year combined ratio improved to 94% for private carriers, as compared to a revised ratio of 100% for 2014 (the previous estimated ratio for 2014 was 98%). The loss ratio is 54% (the lowest in 25 years!) reflecting a 6-point decline against the prior year. The LAE ratio of 14% is a slight decrease from 15% in 2014. The accident year combined ratio for private carriers is 98% for 2015, reflecting a 1-point deterioration from 97% in 2014.
- Investment Results - WC investment gain on insurance transactions was 12%, which is consistent with the 11.6% of 2014. The five-year moving average remains below the long-term average of 14.1%.
- Pre-Tax Operating Gain - A pre-tax operating gain of 18% consists of a 6-point underwriting gain and a 12-point investment gain. While an encouraging improvement over 2014, it's noted that industry operating results can go up and down very quickly.
- Net Reserve Deficiencies - The estimated 2015 WC loss and LAE net reserve deficiency is $7 billion, which is $3 billion less than last year. This amount is about 5% of carried reserves, down from last year's 8%.
- Claim Frequency - WC lost-time claim frequency was -3% over 2014. While the average annual change from 1994 to 2014 is -3.6%, the cumulative decrease over this period is over 50%.
- Claim Severity - The 2015 average indemnity cost per lost-time claim rose to $23,500, which is a 1% increase over 2014. While changes in medical severity by state vary significantly, the average medical cost per lost-time claim decreased by 1% (to $28,500), as compared to a 2.6% change in U.S medical CPI for 2015. Prescription drugs continue to represent a significant portion of medical costs. While prescription drug costs per active claim have increased 25% from 2001 to 2014, the increase from 2011 to 2012 was 10% versus a lower 6% from 2013 to 2014.
- WC Residual Market - The 2015 residual market pool premium of $1.2 billion has remained flat from the prior year. The projected combined ratio for the pool is 106% for 2015 as compared to 104% for 2014.
Dr. Robert Hartwig - The Shape of Things to Come for P/C Insurance Markets and the American Workplace
An annual presence at AIS, Dr. Robert Hartwig is undergoing his own "transformation" as he will be leaving his position as President and Economist of the Insurance Information Institute to become a faculty member in the University of South Carolina's Finance Department, effective August 2016.
Noting the similarities between the favorable P/C results of 2014 and 2015, along with three consecutive years of underwriting profitability, Dr. Hartwig observed that profits and ROE continue to remain below pre-recession levels. Stating that the low interest rate environment is the new reality, he stressed that depressed yields will continue to greatly influence underwriting and pricing.
Labor market trends continue to improve with 2015 reflecting the largest job gains in many years. The U.S. unemployment rate is now 4.9% with a forecast of 4.4% by the fourth quarter of 2016. While labor force participation has improved modestly over the past year, it continues to remain far below prerecession levels. Employment in the construction sector continues to progress well as both public and private construction projects increase. Conversely, oil and gas extraction employment is down 11.2% since October 2014 due to depressed oil prices.
After a progressive upswing in manufacturing employment starting in 2010, it has now fallen to its lowest level since December 2014, based on contraction due to a strong dollar and its effect on exports. Dr. Hartwig emphasized the importance of these sectors; construction and manufacturing constitute one-third of all Workers' Compensation payroll exposure.
As the "sharing economy" continues to grow, it is attracting political and regulatory scrutiny, particularly with regard to workplace protections and the employee/independent contractor issue. These issues have implications concerning insurance coverage that will have to be addressed.
Citing a U.S. Bureau of Labor statistic that transportation incidents accounted for 41% of all occupational deaths in 2014, Dr. Hartwig found this to be an area in which new technologies could be utilized to make an impact. However, as such devices are typically connected to the Internet in some manner, hacking is a concern.
The insurance industry is a growing area of interest for the technology and venture capital communities ("Fin tech" - online finance). Dr. Hartwig notes that investment in insurance technology is rising as a new way of doing things that may have an impact on different parts of the value chain. While some attempts have been unsuccessful (such as Google Compare), he believes there will be more technology start-ups that will bring about change in the industry.
NCCI AIS 2016 concluded as another excellent year for information sharing, networking and looking to the future with respect to Workers' Compensation.
Accident Year medical severity is down and that is always considered good news. The -1.0% was somewhat surprising and with any number relative to WC, it's helpful to give such a number further consideration. As a reinsurer, we certainly do. If the number had been +5.0%, that certainly would have gotten our attention, but there would have been no over-reaction to that single AY percentage any more than to the current -1.0%. With claim duration extending from 30 to 40 years, it is important to take a longer, more measured view.
Sean Cooper, FCAS, MAAA, in the NCCI report "Workers' Compensation and Prescription Drugs: 2016 Update," states that prescription prices are up 11% in 2014 (substantially higher than the 10-year average increase of 4%), and even with utilization down 4%, the end result is prescription costs per claim were up 6%. And for 2014, both physician-dispensed drug prices and utilization were up 4%.
Summary of NCCI's Concluding RemarksPositives
- Continued premium growth
- U.S. employment levels going up
- Further improved underwriting results
- Continued decline in claim frequency
- Slight decline in medical severity
- Questioning of "Grand Bargain" validity
- Extended low interest rate environment
- Drug costs per active claim continue to increase
- Evolving workforce/workplace challenges
Bottom line: Prescription drug inflation was higher than overall medical price inflation. And we can only hope that state-mandated legislation with regard to physician-dispensing will show some progress in this area when the data for 2015 is analyzed.
The bigger, more challenging question may be to ask ourselves how we should think about long-term medical inflation in Workers’ Compensation. What does your company think about this? How do you account for medical inflation in your reserves? This is a dialogue we are open to having with our clients. It’s an issue that matters to all of us in WC. Please reach out; we’d love to chat with you.
We express our appreciation to NCCI for giving us permission to reproduce materials from its 2016 Annual Issues Symposium.
National Council on Compensation Insurance (NCCI) gathers data, analyzes industry trends, and prepares objective insurance rate and loss cost recommendations. These activities, together with our research, analytical services and tools, and overall commitment to excellence help foster a healthy workers' compensation system.