Friday, February 15, 2013

World Ag Expo and Work Comp - Observation

The California State Compensation Insurance Fund (State Fund) held its annual meeting yesterday, and disclosed some important industry trends - most notably that private carrier capacity appears to be shrinking and as a consequence State Fund's business is increasing.

In underwriting parlance, the market is hardening.

State Fund had a 12.9% market share as of Dec. 31, 2011, according to the state Department of Insurance.

According to State Fund President and Chief Executive Officer Tom Rowe, the company recorded three straight months of growth since November as other carriers have reduced their exposure in certain segments of the market or left the state entirely.

Rowe said competitors are not renewing high-risk policies, which is leading more businesses to buy policies from State Fund. The comments were based on the State Funds most recent three months of experience, which showed growth each month.

State Fund's net income in 2012 increased 229% to $359 million from $130 million in 2011, which Chief Financial Officer Dan Sevilla attributed to the carrier's disciplined underwriting approach. State Fund wrote 132,600 policies in 2012, about 10% fewer than in 2011, but average premiums of $7,000 per policy were about 2% higher in 2012, Sevilla said.

I went with a rancher friend of mine to the World Ag Expo, held in Tulare (you pronounce the "e" at the end of Tulare, i.e. "Too-lar-ee"), California every year since 1968 (making this the 45th year!).

This is, as the name suggests, the largest exposition of agricultural products and services in the world, with exhibits and events held over 3 days and 2.6 million square feet of exhibit space.

Exhibitors include just about anything and everything you might imagine connected to the agricultural industry: tractors, farm equipment, soil enhancements, pumps, irrigation ... you name it, it was there, including insurance.

Zenith had several booths, as did Great American. Several brokerages were in attendance. Other work comp related businesses were also present such as special payroll services that coordinate with work comp, and safety companies touting everything from equipment to record keeping for OSHA compliance, etc.

The correlation between State Fund's business and the World Ag Expo was evident by my rancher friend's latest debate with State Fund underwriting about the classification of his employees.

My friend has a relatively small ranch in the Santa Ynez Valley, and just a couple of employees. His profit margins are tight so just a few points on his rates makes a big difference to his bottom line - particularly if the weather is uncooperative in any particular growing season.

But the important part of the story is that my friend has no recourse other than State Fund to cover his employees because his payroll is too small, and ranching risks are too great, for there to be a private market appetite for his business, even though he has run his operation for years without any claims.

As I walked around the 68 acres (yeah, I was tired by the end of the day) and talked with many farmers and ranchers, I found my friend's experience is not unique.

Farming and ranching are dangerous industries. The equipment is massive, with great big pieces of steel ready to shred, rip, mangle, tear and do all sorts of other motions deleterious to human well being. And that's not taking into account the basic physical nature of harvesting, packing, shipping, etc. because there are many operations in farming and ranching that can't be done by machines.

And while there have been many technological advances in agriculture - that's what all these big toys are about - that do make operations safer and more efficient, there is still inherent danger as represented by this one two story tall, 40 foot long contraption I saw that is used to rip out tree stumps and shred them into little bits of saw dust in a single operation.

There were several large insurance companies and brokerages with booths present so I talked to them about agribusiness and their appetite for workers' compensation risk.

Without a single deviation, each of them said that they are looking for "sweet spot" payroll - generally between $1 million and $2 million. My rancher friend's operations are too small to meet that hurdle. The larger operations have more exotic programs to deal with their work comp such as high deductibles or self-insurance.

Also without a single deviation, each of them said that the changes instituted by SB 863 were causing massive operational shifts with increased staffing and new procedures, all in a very time-compressed fashion that they said were very challenging for the carriers to meet.

And though the World Ag Expo is attended by people from, you guessed it, all over the world (I saw many different displays of cultures from other states and nations and heard many different languages), the insurance businesses were mainly focused on California agribusiness - which would make sense since the Central Valley is one of the world's most productive agricultural regions, with over 230 crops. On less than 1 percent of the total farmland in the United States, the Central Valley produces 8 percent of the nation’s agricultural output by value: 17 billion USD in 2002.

Tulare County itself is the second highest in the US for agricultural sales with $3.335 billion in 2007 according to the California Research Bureau.

So obviously agriculture is BIG business when aggregated.

That big business is comprised of a few large operations, and many, many small operations like my friend's ranch.

I recall prior to "open rating" in 1996 all off the small, specialty carriers that made the Central Valley farmers their market and how well served those operations were.

I have nothing against the State Fund - thankfully it is available and healthy to provide mandated coverage for businesses that are too small, and too risky, for the current private market.

But I can't help to think that the workers' compensation risks of small farmers and ranchers, and many other businesses, would be better served by the small specialty carriers that made it a point to completely understand the risks and had programs in place tailored to mitigate those risks, and thus provide superior service in claims management thereby reducing the overall costs of claims.

In my opinion true workers' compensation "reform" should have included a review of the underwriting laws and an examination of a return to "closed rating." I'm not saying that we should blindly return to the days before open rating, but it would be worthwhile to see, if in the past 16 years whether open rating has truly been beneficial to the California workers' compensation market (i.e. the premium paying employers) and the California economy.

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