Wednesday, May 15, 2013

Off To Florida For A Pulse Check

I'm on my way to the National Council on Compensation Insurance's (NCCI) Annual Issues Symposium (AIS) in Orlando, FL.

The AIS is particularly interesting because it provides a national perspective on the health of the industry away from the outsized influence that California's mammoth system imparts. Because NCCI is the rate maker for the vast majority of this country's state systems, it has a broad collection of data to interpret and compare.

Just a few weeks ago NCCI issued its annual report. In summary, NCCI sees claims frequency and severity (i.e. the number of claims filed and the total cost of such claims) as moderating while the overall underwriting market is starting to harden. In general this is good news for insurance companies writing this line of business - less money going out, more money coming in...

In addition, noted insurance economist Robert Hartwig, PhD says in the report (and I'm sure will present at AIS) that while the economic recovery isn't robust, there is still a recovery and this means increased payrolls, ergo increased premiums, for carriers.

The payroll increases are not necessarily going to be the product of an increase in the number of people actually employed though. Hartwig is optimistic on employment figures but I didn't see him mention the large number of people that are no longer reflected in the government's unemployment statistics - the "lost unemployed" or those people who have been unemployed for so long that they will never return to the employment roles.

Indeed, recent anecdotal evidence published in business tomes reflect that, for example, while domestic manufacturing is on the increase in the United States, much of this production is due to technology gains and investments in robotics.

Even Hartwig notes that the Great Recession decimated the construction industry (which has a outsized influence on some states such as California, Florida and Nevada), which shed 2.3 million jobs - or one-third of the construction industry employment rolls - as a consequence of the recession. Though the construction industry is picking up steam, and is expected to continue to grow (albeit tepidly) for the next few years, there's a lot of jobs still on the side lines.

And Hartwig notes that the recovery is not treating all states the same. Nevada, California, Florida and a couple of other states are still in or very near double digit unemployment percentages, while North Dakota has almost no unemployment.

The bigger the state, and the more reliance to real estate for economic activity, the slower the recovery.

So basically, while the economy is recovering, it is still slow and not across the board in either job sectors or state lines.

But overall, the expectation if you're an insurance company is that the workers' compensation market is heading towards black ink, which is delightful news to underwriters and brokers.

That sentiment was apparently echoed at the 12th Annual JMP Securities Research Conference in San Francisco where the chief financial officers of Amerisafe and AmTrust both expressed that it was their belief that the trend is pointing to a hardening market.

Albeit, both of these companies do not represent the average workers' compensation insurance company - both are in niche markets.

Still, this means to me that employers in all of the states that have passed reform laws this past couple of years may not see all of the savings that were predicted.

Data from the Council of Insurance Agents and Brokers shows that in the first quarter of 2013 more than 80% of workers' comp policies had rate increases. In comparison, during the third quarter of 2010, more than 80% of work comp policies had no change or rate decreases

While the insurance market hardens, the big challenge for carriers is still getting a return on cash flow sufficient to keep investors satisfied.

Investment returns have been, and are staying, comparatively low, so the industry's underwriting profits will show a pretax loss of 1% for 2012 according to NCCI's report.

The common thinking is that in order to maintain a consistent return on equity, a 1% decline in the investment yield means companies need to improve their combined ratio by 5.7%. That's nearly impossible in the short term unless some law drastically slashes benefits (either medical or indemnity or both) - for example when SB 899 in California was passed, carrier combined ratios plummeted.

But these ratios increased rather quickly in California as SB 899 worked its way through the courts and the various parts of the workers' compensation machine refined their systems and operations to take advantage of new areas of vagaries and opportunities.

I interpret all of this to mean that employers in general will be seeing bigger premium bills, regardless of competition and reform, on a consistent basis for the next few years as the industry cycle continues to revolve.

One of the elements that keeps me interested in workers' compensation is this omnipresent tension between carriers, employers and workers. It's interesting to me going to different events and seeing how insurance executives, or business owners and risk managers, or injured worker's attorneys, or physicians all react to the same news in different ways.

Because if carriers can't make a reasonable profit on the workers' compensation line of insurance then they will get out of the market.

If premiums paid by employers get too high, then employers change their business models, get out of business or move somewhere else that is cheaper or isn't regulated (Bangladesh anyone?).

And if workers aren't protected and don't get the benefit of the "great bargain" then there are lawsuits, protests or other social unrest that will challenge society, or at least legislators.

This tension is what drives the continual cycle of reform, adjust, inflate, complain, and reform.

So off to Florida I go to take the pulse of the nation's workers' compensation insurance market and to see just where we are in the overall cycle of the industry - at least from the insurance company perspective.

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