Friday, December 14, 2012

Can't Mess With Texas

At the annual National Council on Compensation Insurance (NCCI) state forum for Texas yesterday, Harry Shuford, chief economist for NCCI, warned that workers’ compensation carriers nationwide continue to suffer from low rates of return on investments and reduced premium volume because of slow employment growth.

However, Shuford advised, Texas' workers’ compensation system is in good condition – thanks to reforms and a healthy state economy.

In September, NCCI submitted to the Texas Insurance Department a proposed 3.8% reduction in loss costs, with an effective date of June 1, 2013. The department has not yet acted on the filing.

Terri Robinson, NCCI state executive for Texas, pointed out that premium volume increased to $2.16 billion compared to $1.92 billion in 2010 and $2.19 billion in 2009. The highest volume for the past 10 years was $2.81 billion in 2006, according to Robinson.

Combined ratios “remain favorable,” despite some deterioration, Robinson said. In 2011, the combined ratio for Texas was 94%, compared to 93% in 2010 and 82% in 2009.

I like that Robinson characterized that Texas' combined ratio is experiencing "some deterioration." Most states would kill to have combined ratio stats like Texas - which I believe may be one of the only states where work comp carriers actually make an underwriting profit.

Medical costs also are dropping in Texas according to NCCI - Texas' average medical claim severity on lost-time claims decreased 4.9% in 2010, to approximately $23,500 per claim. In 2009, costs dropped 7.3% to an average of approximately $24,700 per claim.

Medical claim severity has been on a downward trend since 2000, when the average cost per lost-time claim was approximately $38,700.

What's going on in Texas that's different from any other big state, or any other state in the Union generally?

To quote the Clinton campaign for president in 1992 - "It's the economy, stupid!"

Robinson and Shuford both said Texas is benefiting from a strong economy which is outperforming the national average.

We in the work comp industry forget quite often that the fortunes and perils of our industry are directly tied to the economy. Workers' compensation, at its very most basic operation, is all about jobs. The fewer jobs there are, the fewer workers that are employed, which means total payroll is down, translating to lower premiums.

Lower premiums mean less money to support overall workers' compensation operations because reserve money is already dedicated to paying claims.

And one of the most significant issues with this economy is that the industries most affected - construction and manufacturing - are the slowest in recovery. This affects workers' compensation disproportionately because construction (in particular residential construction) and manufacturing generate the highest premiums because they are high risk industries.

NCCI nevertheless has recommended a 3.8% decrease in loss cost filings, that include:
  • Experience, minus 6.3%.
  • Trend, plus 1.5% (indemnity, plus 4.1%, and medical, 0.0%).
  • Benefits, plus 1.1% (state average weekly wage, plus 1.9%, and medical schedule, plus 0.5%).
Average changes by industry group include:

  • Manufacturing, minus 2.6%.
  • Contracting, plus 0.9%.
  • Office and clerical, minus 6,2%.
  • Goods and services, minus 9.6%.
  • Miscellaneous, minus 0.4%.

In the meantime, Peter Rousmaniere and Jack Roberts, both from the Risk & Insurance group of publications, have just released a thorough, non-biased, review of ERISA-based non-subscription models (that I call Work Injury Insurance Plans, or WIIPs) that are currently operating in Texas, and as had been (and will be) proposed for Oklahoma (and perhaps Tennessee). The report is entitled Workers' Compensation Opt-Out: Can Privatization Work? The Texas Experience and the Oklahoma Proposal.

(A great review of this report is authored by Tom Lynch of the Lynch Ryan brokerage and can be read on his blog at

The hypothesis that Rousmaniere and Roberts postulate is that regulated WIIPs could work in other states if properly structured, thus creating another option for employers interested in taking care of their workers in the most efficient and beneficial manner. Their paper provides pretty strong evidence that WIIPs can work.

I contend that one of the reasons Texas' current workers' compensation system is so efficient is because of the inherent competition that WIIPs place on the traditional system.

Texas' work comp system, prior to HB 7 in 2005, was a mess. Quite frankly, its operational dysfunction was rooted in the calamity that was previously known as TWCC, or the Texas Workers' Compensation Commission. HB 7 dismantled that agency and transfered all of its functions into the Department of Insurance.

This ended decades of insular operations within the Texas state government and moved responsibilities of an insurance program to an agency that actually understands insurance and its regulatory environment.

Another move contained in HB 7 that I think doesn't get the credit it should is that the bill imposed mandatory rate regulation by the Department of Insurance if it finds insurance rates excessive in December 2008, after implementation of the reforms.

In my opinion, rate regulation (not advisory like in California) is absolutely required for a healthy workers' compensation system. Bottom line - some carriers require discipline, others just shouldn't be in the business. But by the time that these facts become known to policy purchasers, it's too late (California, you hear me?).

In 2013 WIIPs will again be part of the Oklahoma legislative agenda, and may also be on the Tennessee agenda, along with other workers' compensation reform initiatives. The results in Texas are hard to argue against. The question is whether the culture of that system can be exported to other states.

Or will migration to Texas continue to increase?


  1. Workers' Compensation - The Hobbits Will Face an Expected Journey

    The report, funded by an insurance industry provider, highlights significant problems with the present OPT-OUT program. It is obviously, biased.

    The acknowledgements are void of any significant contribution or comments or ideas from those who represent injured workers. That void raises critical issues going forward for widespread adoption. Workers, injured or not still vote, more than dollars.

    One thing is for sure, the present system nationally is failing rapidly to meet the expectations and intent of the 1911 crafters. What it will morph into is really anyone's pue guess at this point in time. Change will happen though out of pure need and not one-sided reform.

    The present system benefits no-one except for the cottage industries that have grown up from middle-earth like the Hobbits. This journey to a new program is though "an expected journey."

    Nevertheless, it is VERY questionable, if an ERISA type program could be utilized legally at all.

    The more one analyses the present system, the more it becomes clearer that the US needs to follow the European Union (EU) and adopt a universal healthcare program.

    Jon L Gelman

  2. Thanks for the feedback John. It all depends upon what one wants from the system. In nearly every "mature" WIIP that I've come in contact with the workers are nearly unanimous in their praise for medical care and quick wage replacement while off work. Nearly all bemoan the lack of a payout at the end of the process, but as the Rousmaniere study suggests, nearly all return to work (but as you have alluded to, how many of those that aren't reported were terminated...?). I agree that some sort of universal health care system would seem to be more efficient, and I've seen arguments (some of them good) that reflect otherwise, that it just could not work - at least in this country. I don't know the answers, and I don't think anyone really does. The best we could hope for is social experimentation - that is why I'm for WIIPs. It's a challenge to traditional thinking, and in my opinion original though is something that is missing in the work comp / health care dialogue.