Wednesday, September 17, 2014

Walking A Highline

The tension between social responsibility and financial gain that is the workers' compensation insurance industry is reflected in the latest California Workers' Compensation Insurance Rating Bureau's data report.

Lower frequency and continued premium growth is making the business in California more attractive to carriers seeking to profit from underwriting the system.

Carriers are projected to write $16.1 billion in premium in 2014, WCIRB Vice President and Actuary Tony Milano said during a webinar yesterday, and have already recorded $8.2 billion through the first six months of the year.

The projected total written premium for calendar year 2014 would be 8.7% more than the $14.8 billion reported for 2013 and would mark the fifth consecutive year that premium has increased.

Written premium in 2013 was 68.2% higher than the $8.8 billion reported in 2009, while the projected $16.1 billion for the current year would be 83% more than what carriers wrote in 2009.

Some of this premium growth is due to the improved labor market which would boost payroll based premium, but it's more a reflection of the insurance industry's willingness to charge more to make up for paltry investment returns as earlier bonds and other financial instruments come due, and get replaced by current low interest rate backed portfolios.

According to the WCIRB, through the first six months of the year, carriers on average charged $2.96 per $100 of payroll, 3.9% more than the $2.85 they charged last year. The average rates charged in the first two quarters of 2014 is 41% higher than the average $2.10 charged in 2009.

Ultimate losses and allocated loss-adjustment expenses are projected to be $12.7 billion for accident year 2013. In the first quarter insurer experience report, the WCIRB was projecting ultimate losses and ALAE for 2013 of $13.1 billion.
It's a balancing act... we're in this together.

This is leading the bureau to lower its projected losses and costs for accident years going back to 2009 by $500 million. The WCIRB reduced projected ultimate costs for accident years 2009 through 2011 by $100 million each, and reduced its projection for accident year 2012 to $12 billion from $12.2 billion.

Claims are cheaper too.

The projected ultimate total loss and ALAE per indemnity claim dropped to $86,845 in accident year 2013 from $87,232 in 2012. It is the first decrease in ultimate claim costs since 2005.

While the WCIRB, and nearly every other insurance company in nearly every state, decries combined ratios in excess of 100 - meaning that more money goes out the door in claims than is taken in through premium - that obfuscates the financial picture.

The combined ratio is a cash basis measurement, but most all other measures of the insurance business are accrual basis.

There's good reason for that: cash in today does not pay for claims today. Cash in today buys investments, the returns of which will partially be used to pay for claims tomorrow, the balance of which will represent profit (after some deduction for operational expenses).

So while the projected combined ratio for 2013 is 109%, down from 114% in the previous year and the lowest ratio since 2008, and is higher than the national average of 101% for 2013 (National Council on Compensation Insurance estimate), this is simply a reflection of better profitability.

Workers' compensation insurance is not designed to generate an underwriting profit, which would be reflected by a combined ratio of less than 100. It was designed as an investment platform that also generates social value.

For every claim that is measured, and for all of the numbers that are analyzed, by the insurance industry, at the end of the day there are employers paying for the system, and there are injured workers that are supposed to be the beneficiaries of the system

A healthy insurance market is necessary to support a good portion of the workers' compensation system because that is how most businesses secure their obligation to provide compensation.

But if my premium, as an employer, continues to go up, regardless of causation, then another reformation will be forthcoming. Employers give money to politicians...

And don't forget about the injured worker. We continue to see both anecdotal and evidentiary reports of failures to deliver both timely and adequate medical treatment and indemnity benefits. I can't say that this part of the equation has improved, other than the statutorily based increase in disability indemnity weekly benefits.

Florida's Chief Workers' Compensation Judge, David Langham, said in his blog the other day, "all workers' compensation cases, involves real people, important issues, critical points of law and construction."

It's good that the insurance industry is seeing a better overall picture than what was previously expected.

But without employers willing to pay for securing their obligations, and without injured workers getting their legally entitled benefits in a socially acceptable manner and time frame, the industry fails to meet its mission and whether or not it's healthy is no longer important.

It's a tricky balancing act. The insurance industry can't be smug - we're all in this together.

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