Thursday, May 10, 2012

At NCCI's Annual Issues Symposium

I made one of my biannual pilgrimages to Orlando, Florida, yesterday - man that's a long travel day!

I'm in Orlando this morning for the National Council on Compensation Insurance (NCCI) Annual Issues Symposium 2012 (the other trip is in August for the FWCI conference).

For those of you unfamiliar with NCCI, it is the largest workers' compensation rate making association in the nation, managing rates, data, and other vital services for most of the nation. Because of this unique position, NCCI has the most comprehensive data for state by state comparison as well as for spotting trends.

This is a long trek for only a couple of days, and each year I wonder whether the trip is worth it, and then each year I go away affirmed that I have to return the next year.

If you want to understand the macro-view of the workers' compensation industry the NCCI Symposium is the place to get that view in one day as they cover not only what the insurance industry is doing, but the overall economy with a forecast, overall medical trends and other issues that are not work comp specific but which impact the industry.

In addition the Annual Symposium is a great place to catch up with colleagues, regulators, executives and other industry notables.

Last year NCCI's president and CEO, Stephen Klingel, opened the event as he does every year with an overview and his State of the Line Report in 2011 described the industry's experience as "deteriorating", with increasing combined ratio, decreasing premium base (due to lower payrolls), poor investment returns, and a trend upwards in claim frequency and severity.

This year I expect Klingel to tell us that the industry is still perilous, but that stability is coming into play as the economy, albeit tepid, appears to be improving.

One of the key components to industry health is the residual market. For those unfamiliar with this concept a residual market serves the "last resort" market in those states that don't have a state fund - in order to write in a non-fund state carriers must offer coverage for those employers that don't qualify for the best pricing and rates.

What NCCI's data is showing is that residual market participation is increasing. This is a positive indicator because the base for residual markets are new employers and businesses that are high risk (e.g. construction). So an uptick in residual markets means that the base employment numbers are going up which reflects positively on the economy.

Tempering this is an increase in claim frequency which was not forecast earlier. The traditional thinking is that claim frequency is tied to the economy and that high unemployment coincides with low claim frequency because there are fewer people working that could get hurt.

The poor economy should not generate more claims, but the data is refuting that assumption. The adjusted results (adjusted for statistical anomaly) demonstrate a 3% increase in frequency. It will be interesting to see if NCCI has any insight into this phenomenon.

NCCI does not see broad based reform initiatives across the nation because it is an election year, but the one state that impacts workers' compensation in a disproportionate manner is California which is not an NCCI state, and while California may not push through something in 2012 it is obvious that something will occur at the latest by 2013. I expect the speakers to address the outsized influence of California's reform efforts on the nation - every year NCCI does national comparisons with California included and without in order to demonstrate the state's influence on the market but usually that is from an underwriting perspective. With California's reform focus on the benefit delivery system there may be residual influence on other states.

Another aspect that may be touched on would be the Oklahoma non-subscription effort - clearly that is a potential trend that is just starting and has obvious implications for the industry. Does NCCI think this is just an isolated incident, or do they see this as a potential national trend? I'm going to "ask the experts" during a break, which NCCI encourages.

One thing that must always be understood about NCCI's data and forecasting is that, while pretty accurate, it always changes because of the "long tail" nature of workers' compensation so as new data comes in on prior policy years the folks who analyze this information make alterations to their reports.

For instance, NCCI notes that the premium growth that was observed in 2010 is actually larger than previously reported, offering as an explanation that carriers over-compensated for audit returns experienced in 2010 and are actually seeing additional premium booked through those audits (i.e. payroll was more than first reported).

Other presentations will cover the overall economy, the coming impact of implementation of the Federal Patient Protection and Affordable Care Act, Dodd-Frank Act and recommendations that may come out of the new Federal Insurance Office. We'll hear about the impact of the aging work force, changes trending in international labor markets and legislative/regulatory trends.

I don't know what word Klingel will use to describe the State of the Line this morning but I expect it to be a bit more optimistic than last year's dismal forecast.

Stay tuned!

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