Monday, July 30, 2012

Work Comp Rates and Politics; Just the Way It Is

An interesting thing happened on my way to the [residual] market the other day - there were a lot more businesses in there than last year.

For those of you unfamiliar with residual markets - those are the assigned risk pools in states that do not have a "carrier of last resort" (i.e. a state fund). Carriers participating in these state markets are required to provide coverage for those businesses that can not get traditional workers' compensation insurance. In those cases there are pools where a carrier must take an "assigned" business and provide coverage. These are typically very high risk businesses or brand new businesses that have not established a safety or loss record. Because of that assigned risk categories are charged more for coverage.

According to the latest report from the National Council on Compensation Insurance (NCCI), new assignments to state residual market pools is up 9.2% on average resulting in new assigned premium going up 68.9% for the second quarter of 2012, compared to the second quarter of 2011.

On a year-to-date basis, the number of new assignments is up 13.4%, and new assigned premium is up 89.4% for 2012.

There are three basic elements to this surge in the residual pools: carriers can't make adequate money in the investment arena to cover their risks and gain a profit due to the economy; political philandering is artificially suppressing rates; and a tightening of underwriting standards in the voluntary market because of higher than anticipated loss ratios.

What is interesting about this latest surge, according to Harry Shuford, practice leader and economist with NCCI, is that the increase in the number of assignments have been “particularly pronounced in larger risks.”

In other words, more mature businesses are being assigned to the high risk pools which indicates that carriers are being much more selective with whom they take on voluntarily.

Shuford attributes this to a combination of high loss ratios the past couple of years and poor investment returns, which are not expected to reverse course for the next couple of years.

The other element though is the political interference in rate making. When rates are held artificially low carriers have little recourse in their bag of risk allocation tricks to protect their assets - and one of the tricks is to put more businesses into the assigned risk pools.

This is a form of "market hardening" that is likely to continue for the next few years until payroll increases sufficiently to generate adequate premium base.

The risk to the economy though are spikes in premium that spook employers.

While the actual dollar amount of premium increase may not be alarming on a period over period basis, when an employer's premium doubles from one quarter to the next as a consequence of reassignment it causes panic and disruption begetting further political machinations that may not otherwise occur if premium increases are smooth and predictable.

David Long, president of Liberty Mutual Insurance Co., said during a conference call last week that “while I am happy to receive fees, and in all likelihood better profits, for servicing these pools, it’s just not healthy for the industry.”

Artificially suppressing rates eventually catches up to the industry and to the premium paying businesses with spikes in premium down the road.

Smooth, progressive inflation of rates is much more palatable to the premium payor (employer) than single large increases every few years, which are difficult to plan for and disrupt the budget.

But workers' compensation is a politically created animal and thus is a politically manipulated system for the expediency of politicians. 

That's just the way it is.

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