Wednesday, March 20, 2013

The Money Must be Okay

There had been indications in the past couple of years that a "hardening" of the workers' compensation market was inevitable and that "profitability" would return to the line.

A report this morning in WorkCompCentral reflects that trend, and some surprisingly candid quotes from insurance executives indicate that carriers are willing to endure the tough times in work comp in exchange for the chance to write the more profitable lines.

The cost of capital and comparatively low investment returns require increased reserves. High combined ratios in consecutive years might shake a mono-line writer, but for multi-line, multi-jurisdictional carriers, its just a marketing opportunity.

“Because it is a long tail line, insurance companies have to set more capital aside to support those liabilities," Mark Wilhelm, CEO of Safety National Casualty Corp. told WorkCompCentral's David Dankwa. 

"So, if your return on equity on workers' compensation is lower than any line of business, plus you have an additional capital charge associated with that, a carrier has to ask themselves, 'Why am I doing this?' In many cases they do it simply as an accommodation to write the more profitable coverage,” said Wilhelm.

Dankwa observes however that there are some carriers that are questioning this practice and may be pulling back, but both Wilhelm and Robert Hartwig, president of the Insurance Information Institute, say they do not expect significant consolidation or contraction in market share among the major market leaders, even though some like AIG and Liberty Mutual have indicated they are not as anxious to write workers’ comp this year.

Why? Because after seven consecutive quarters of rate increases, workers’ compensation insurance rates are outpacing loss trends with double digit premium growth in the major markets.

For instance, American Financial Group recently said its California workers’ comp business recorded its first double-digit price increase of 11% in 2012 during the fourth quarter.

And AmTrust, a multiline insurer that started as a monoline workers’ comp writer, said it is experiencing the largest rate gains in major markets such as California, where prices are up roughly 18%, and in New York and Florida, where they have jumped 8.3% and 8.1% respectively.

American International Group reported that its workers’ compensation business in the United States raked in rate increases of 12.4%.

Joe Paduda, who writes the blog Managed Care Matters (and coincidentally will be the keynote speaker at the Annual California Workers' Compensation Institute meeting tomorrow in San Francisco), wrote yesterday that senior level executives at the big carriers misconstrue what business they're in; that they think they're in the insurance business when they are really in the managed health care business.

"Senior management misunderstands their core deliverable – they think it is providing financial protection from industrial accidents, when in reality it is preventing losses and delivering quality medical care designed to return injured workers to maximum functionality. That lack of understanding is no surprise, as most of the senior folks in top positions grew up in an industry where medical was a small piece of the claims dollar, where medical costs were considered a line item on a claim file or number on a loss run, and not “manageable”, not driven by process, outcomes, quality.

Paduda is looking at workers' compensation from the claims perspective. Claims in only one aspect to workers compensation.

Another aspect is much more basic, and easier to understand - profits. Insurance is a business, pure and simple. There is nothing altruistic about workers' compensation insurance. Preventing losses and delivering medical care are just expense items.

I often deride vendors in the workers' compensation business who seek special interest protectionism in either legislation or regulation, but insurance companies are no different. If insurance companies can not make a buck, either directly or indirectly, from workers' compensation then they will get out of the business.

So while I don't exactly disagree with Paduda's assessment of executive thinking, it needs to be tempered with the fact that "C-level" executives have a very simple mandate - provide a profit to investors.

Paduda's comments may reflect how best to regulate the costs associated with the line and that's commendable. But let's all get back to basics - if there isn't money to be made then the business goes elsewhere.

With what I'm seeing, the money must be okay in workers' compensation.

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