My Lesson About Insurance

What did I learn at NCCI's Annual Issues Symposium?

I learned that the workers' compensation line in the property & casualty insurance business did much better than it has in the past 5 years - the overall national combined ratio for private carriers in the business is down to 101 based on calendar measures, and accident year measure is estimated to be 99.

Those are near perfect numbers indicating that the private carrier market is operating at almost perfect efficiency.

On top of that, investment gains were much more robust than previously forecast, with the work comp line ending up as one of the more profitable lines in the P&C industry.

Operating gains rose sharply, measured at 14%, up from 5.6% the year before and the second highest since 1997. These numbers were attributed to strong underwriting results (see above!).

NCCI reported that there was a 5.4% increase in written premium from the year before at $37 billion. The rate of increase was above the P&C average of 4.6%

With regard to investment returns, embedded yields were called "notably higher" than new money yields and return on surplus was reported at 10.3%. This is WAY better than past 5 years and was attributed to unexpectedly good results from Wall Street as carriers sold stocks and bonds for solid (taxable) gains.

Of course there was the caveat that equities comprise only about 20% of carrier portfolios so a strong bond market was key; but as was noted in the past the older  high yield bonds are being replaced with new low yield bonds, so the NCCI wonks are still conservative about calling this a trend.

Nevertheless the investment returns being reported were much better than previously forecast.

So, to summarize, this overall industry profitability occurred because of lower expenses, better than anticipated returns on stocks (not so much bonds) and lower resistance to increased rates and premiums.

I can already hear the objections from those who have some dislike of insurance companies, and I can certainly understand because it is sometimes difficult to have the warm and fuzzies for folks that take money from you and then seem to delay or fail to pay it back when something happens.

Fair enough - reality is that everyone at some point in time hates insurance, even insurance professionals. Insurance touches us at a very deep, emotional level - when we have a claim it is generally a moment when we are the most vulnerable and need the services or benefits.

Others decry industry warnings from time to time about threats to the industry and carrier profitabilities. But the reality is that this is America, a capitalistic economy. People in this country don't do things unless money can be made - profit.

The insurance industry and particularly workers' compensation, is heavily regulated, and returns on the line of business can be notoriously fickle with all sorts of unseen risks interjecting into balance sheet.

The truth is that insurance companies need to make a profit and generate a return on investment to shareholders. If they don't then shareholders ("equity investors" part of the risk formulation) go elsewhere. The fact that there is an insurance industry (i.e. people) that is willing to take on workers' compensation liability should be rewarded.

That does not mean that every insurance company should be applauded, or that all insurance companies are good.

But without insurance companies willing to take on the risk of covering the risks generated by our laws, we can't have a competitive workers' compensation system.

I do believe that the vast majority of the workers' compensation insurance industry is motivated to do the right thing within the framework of the laws and regulations that created and manage the system.

Yes, that motivation is propelled by money. Money comes in the door in the way of premiums and allows the risk of work injury and disability to be spread against a large population so everyone bears some part of this social risk.

The social risk is not limited to work injury and disability either. Insurance operations (along with all of the other financial intermediary businesses created by modern economies) create a huge amount of jobs.

Not just insurance jobs, but employment across the economic spectrum. Lawyers get employed (representing both carriers and injured workers), doctors get referrals, brokers, agents, safety and risk people; all are examples of indirect employment through insurance.

Through insurance investments other jobs and contributions to the economy occur. For instance, the Southern California town of Rancho California near Temecula started out as a long term investment of Prudential Insurance (okay, not a work comp carrier, but a life insurance company that probably does buy long tail comp books of business investments too...). That huge long term investment created construction jobs, financial jobs, and the community built provides ongoing economic activity with stores, infrastructure, schools, etc.

Healthy, strong, financially motivated insurance companies serve as a critical intermediary between risk and stability.

It IS a good think when the insurance industry is making money. Granted, there of course needs to be tight regulation because it is too easy for unscrupulous operators to take advantage of the public in an involuntary "free" market such as work comp - that there are people willing to step up, meet the regulatory challenge, fulfill that critical intermediary role and provide that economic lubrication should be rewarded.

That reward is called, "profit."

There's always going to be that faction which is critical of the fat cat insurance carriers taking the public to the cleaners, and leaving the injured worker destitute and ripping off employers.

I can't do anything about those sentiments other than to suggest that those who have those feelings invest in workers' compensation insurance companies.

MY CONCLUSION - unexpected investment returns, low resistance to premium increases and continued decreasing in losses produced better than expected  results for the industry - i.e. carriers are making money! At least on the macro level.

And that's okay.