Workers’ Comp - Adapting for the Future
Facing a future with numerous challenges, the Workers’ Compensation industry had another positive year in 2016. While trending favorably for the past several years, this is the second consecutive year in which a 6-point underwriting gain has been achieved. Other positive results include stable premium growth and a continued decline in claim frequency.
While complimentary of the industry’s accomplishments and solid financials, NCCI President & CEO Bill Donnell reminded everyone of the cyclical nature of our business along with the need for Workers’ Comp to stay “relevant” throughout the constant change in its environment, which he believes will be coming at a faster pace than in the past. Instead of representing the current state of Workers’ Comp, Mr. Donnell’s descriptive word this year pertains to what is required for its future: “Adapting.”
Citing challenges, such as new technologies, the evolving workplace and workforce, and other industry disruptors as examples, Mr. Donnell stressed that the Workers’ Comp industry needs to embrace and adapt to trends that are unfolding in order to stay relevant or potentially suffer the fate of industries and companies that failed to do so in the past.
NCCI CEO Overview
With over 900 in attendance, Mr. Donnell opened the 2017 NCCI Annual Issues Symposium by reaffirming NCCI’s own mission to stay relevant by continuing to provide valuable data, insights, tools, and services to the industry and by continually enhancing them to be of even further benefit to its stakeholders.
As part of Mr. Donnell’s emphasis on the importance of the industry maintaining relevance, he reviewed the beginning of Workers’ Compensation and how it was born from the need to protect injured workers and their families while helping to insulate employers from the uncertainties of litigation, hence the creation of the Grand Bargain. As Mr. Donnell indicated, Workers’ Comp solved a problem and became relevant.
Its relevance continued throughout the years, Mr. Donnell pointed out, by the increase in the extent of its use and in the amount of value it brings to its key stakeholders. He noted that of the 124 million fulltime workers in the United States, Workers’ Comp is involved with 95% of them. This percentage is up from 85% in the 1970s. Regarding the value it has brought, Mr. Donnell listed the following:
- The role of insurers in helping to create safe workplaces has resulted in a decline in loss frequency by 50% over the last two decades.
- Workers’ Comp has prioritized the return to work of injured workers, which is good for the workers and their families, their employers, and society at large.
- The system has developed a fair and equitable way to rate both large and small businesses with the use of over 600 job classifications.
Mr. Donnell provided two examples of the Workers’ Comp system successfully returning an injured worker to gainful employment with the assistance of their employers and medical professionals. He also recognized John Leonard, President & CEO of MEMIC, as someone who embodies all of the qualities of the Workers’ Comp industry. By endorsing and implementing a strong safety culture, Mr. Donnell continued, Mr. Leonard has served his company, the State of Maine and the Workers’ Comp stakeholders very well. We at Gen Re most certainly agree.
According to Mr. Donnell, the past 100 years has shaped a relevant, yet imperfect system. Noting the significant difference in benefit levels across certain states and the existence of fraud, he did not downplay these issues but stressed the need to be transparent about them while making efforts to find solutions.
Mr. Donnell also pointed out that Workers’ Comp adapted, as the nation’s workforce shifted over time from an agricultural base to manufacturing and to the present day service sector. While what’s next is uncertain, Workers’ Comp must continue to adapt to different and changing needs of employers and employees. On this note, Mr. Donnell had these recommendations for those within the industry:
- Communicate the Value Proposition of Workers’ Compensation
- Relay its role in creating safe workplaces and prioritizing return to work.
- Share its success stories.
- Be mindful of the balance between stakeholders
- The fragile balance is what makes the system work.
- Without proper balance, the basic tenets of the “Grand Bargain” are at risk.
- Expand thought leadership
- The world is changing quickly.
- We need forward-thinking views with fact based research.
- Pick up the pace
- There is a need to be quicker and more agile.
- Consider goal of being “real-time relevant.”
Mr. Donnell closed with a final reminder that the Workers’ Compensation industry is strong and healthy. There is power in the ability to be flexible and we need to adapt to the changing needs of those we serve.
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 2016 data is preliminary, here are some highlights from Ms. Antonello’s presentation:
- WC Premium - Net written premium for private carriers increased to $40.1 in 2016—as compared to $39.7 billion for 2015 (an increase of 1%). The total WC market net written premium volume of $45.5 billion remains unchanged from 2015 and remains below the prerecession peak of $47.8 billion in 2005. The total P&C industry net written increase for private carriers was 2.6%.
- WC Combined Ratio - The calendar year combined ratio for private carriers of 94% for 2016 remains unchanged from 2015. Consecutive combined ratios have not been at this level in 30 years. The loss ratio is 53% (while only a 1-point decline against 2015, it is the lowest since 1995). The LAE ratio and underwriting expense ratio have remained flat at 14% and 25%, respectively. The accident year combined ratio for private carriers is 98%, a 2-point increase from 2015.
- Investment Results - WC investment gain on insurance transactions was 12% for 2016, a slight increase over the 10.9% from 2015. This is still below the 20-year average of 13.7%.
- Pre-Tax Operating Gain - A pre-tax operating gain of 18% for 2016 remains unchanged from 2015 and consists of a 6-point underwriting gain and a 12-point investment gain.
- Net Reserve Deficiencies - The estimated 2016 WC loss and LAE reserve deficiency is $5 billion, which is $2 billion less than last year. This amount represents approximately 4% of carried reserves.
- Claim Frequency - WC lost-time claim frequency was -4% for 2016. The average annual change from 1995 to 2015 is -3.6%.
- Indemnity Severity -The 2016 average indemnity cost per lost-time claim rose to $23,900, which is a 3% increase over 2015.
- Medical Severity - The average medical cost per lost-time claim increased by 5% to $29,100 in 2016. Starting this year, NCCI now uses the Personal Health Care Chain-Weighted Price Index (PHC) as a proxy for medical care price inflation that responds to changes in the blend of different medical services over time. In 2016, the PHC rose 1.3% as compared to .8% for 2015. Medical cost drivers include 38% physician costs (of which 24% of these costs being related to surgery). Prescription drugs make up 11% of all medical costs.
- WC Residual Market - While the residual market pool premium has remained flat at approximately $1.1 billion, the projected combined ratio is 106% for 2016 as compared with 103% for 2015.
- WC and SSDI - The interaction between WC and Social Security Disability Insurance was displayed with regard to “dual-recipients” and how the amount of WC benefits can either increase or reduce the SSDI portion when subject to a combined benefit cap.
Kurt Karl - The U.S Economy’s Effect on Financial, Insurance and Workers’ Comp Issues
The Economic Keynote speaker at this year’s AIS was Kurt Karl, PhD, Chief Economist at Swiss Re.
Mr. Karl pointed to several factors that have led to disappointing economic growth over the past several years: a commodity price bust, a slowdown in productivity growth, and a slowdown in trade growth. As such, the recovery from the recession has been much slower than anticipated, resulting in the concern that moderate growth is likely to be the “new normal.” Mr. Karl said he expects moderate global growth in 2017 and 2018, driven by the U.S. and emerging markets.
With regard to the insurance market outlook, Mr. Karl reviewed several key macro drivers of the Property & Casualty market. On the current low interest rate environment, there is a gradual increase in U.S. long-term rates; however, the current low rates drive excess capacity and alternative capital resulting in continuous competitive pressure. As mentioned, moderate growth is expected, with possible acceleration in energy and infrastructure. Reserve releases have been fading with adverse development in commercial lines. Mr. Karl observed that soft market conditions continue to result in stagnant commercial premium growth. While the U.S industry’s loss reserve position continues to weaken, citing personal and commercial auto as the largest contributors to adverse development, he noted that Workers’ Comp has had the most significant increase in favorable development.
Claim frequency has been declining; however, Mr. Karl believes there may be an uptick as stronger economic growth eventually develops. Workers’ Comp fatalities have stabilized but appear to trend higher among those that are self-employed. Conversely, he pointed out the strong increase in the frequency of motor vehicle injuries (including fatalities), especially in trucking. Mr. Karl noted that overall traffic deaths have increased 14% from 2014 to 2016, with many involving distracted driving and higher speeds. As to select Workers’ Comp demand drivers:
- The housing recovery has been extremely slow but is growing.
- Manufacturing employment continues its own slow recovery but remains in a long-term decline.
- Construction employment is growing at a healthy pace and is expected to continue.
Touching on the issue of technology and Workers’ Compensation, Mr. Karl previewed such benefits as increased safety, the use of wearable real-time alerts in monitoring worker posture and fatigue, and Telemedicine, along with other advances in medicine that can impact the accuracy of diagnostics and reduce medical errors. However, automation will also have a negative impact on payroll, particularly with regard to occupations involving predictable physical work.
Similarly, emerging technology will change the insurance business model in the future. The further development of artificial intelligence may produce virtual assistants for direct sales, underwriting and robotic self-service portals. Connected cars will be able to offer vast amounts of data, while algorithms replace human intervention. Just as this technology provides new opportunities, Mr. Karl warned of further challenges pertaining to privacy issues and cyber risks that create ever-changing security vulnerabilities.
Workers’ Compensation continues to provide significant value to Injured Workers but the basic premise of “The Grand Bargain,” in many jurisdictions, is being challenged. How we as Workers’ Comp insurers and reinsurers respond to these questions and challenges may contribute in a vital way to the outcome that state legislatures are debating.
Summary of NCCI ObservationsPositives
- Stable premium growth
- Consecutive 6-point underwriting gain
- Continued decline in claim frequency
- Improved investment results
- Reduction in WC reserve deficiency
- Need to adapt to change in order to stay relevant
- Disruptive technology
- Evolving workplace & workforce
- Increasing medical severity
- Need to share WC success stories
States are wrestling with the balance between the adequacy and fairness of benefits to injured workers with the costs associated with Indemnity and Medical benefits. This balance is fragile as we observed during the recent economic recession when some employers were closing their doors and others were forced to lay-off employees. The future looked bleak. Now with unemployment falling and optimism rising due to job creation and wage growth, there remains a cloud of uncertainty or, at least, questions directed at The Grand Bargain.
Bill Donnell, NCCI CEO, articulated it well. We need to tell the positive stories - and there are many - concerning injured workers returning to work and receiving the rehabilitation they need in order to do so. But we also need to be honest with ourselves about the bad players and fraudulent actors and call them out for the part they play in undermining and damaging our industry.
Together we can make a better work place for America, for employers, for employees and for the states trying to find “just the right” balance.
We express our appreciation to NCCI for giving us permission to reproduce materials from its 2017 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.