Wednesday, October 29, 2014

The Hedging of Work Comp

Workers' compensation, like most property and casualty lines of insurance, goes through a cycle. Work comp in particular for many states seems tied to a seven to ten year cycle of "hard" versus "soft" markets.

A "hard" market is where the insurance industry has more control and power over pricing. A "soft" market is where the consumer of insurance products has more power - i.e. there is more price competition in the market.

Some analysts have been saying that the current market is an interesting mix of the two - that there really isn't any great power in the industry to raise prices because there's plenty of capital seeking returns, but carriers have been able to get away with increasing prices to make up for the soft investment environment.

And employers aren't revolting yet.

Willis Group Holdings is an international risk advisor and insurance and reinsurance brokerage that makes annual predictions as to the insurance market, including workers' compensation.

In a press release Monday, Willis North America's Chief Placement Officer Matt Keeping said that the market might be heading for a disruption of the traditional softening and hardening cycle of property and casualty insurance rates.

And it seems that this year is an example of what Keeping is saying.

For workers' compensation insurance, the group predicted rate changes between a 5% decrease and a 5% increase, although some large state markets post likely increases.

In its semi-annual "Marketplace Realities" report, Willis says that California might see an increase of about 8%. Other states with potentials for price hardening include New York, Massachusetts and Pennsylvania.

California's independent rate-making agency, the Workers' Compensation Insurance Rating Bureau, has filed an advisory rate of $2.77 per $100 of payroll for 2015. That represents a 3.5% increase above the $2.68 advisory rate the state's insurance commissioner filed last year.
Even Bowzer can smell the money.

The Willis report does not take into account the financial chicanery that is used to sell insurance such as dividends, rebates, rate adjustments etc. But an alarming note to me is that Willis says that hedge funds find workers' compensation investments attractive.

"Despite several leading carriers moving away from the line, the hedge funds see predictability and profits, even if one of the predicable aspects of Workers’ Compensation is that 15-20% of the loss cases can last the life span of the injured employees," the report states. "Part of the hedge fund interest is in ancillary services associated with Workers’ Compensation and managing of the claims."

Indeed, the "long tail" of workers' compensation is PERFECT for a hedge fund to make money via "ancillary services" - if a case is going to last 15 years, that's 15 years worth of bill review, utilization review, copy services, interpreting services, etc. etc. etc.

Investopedia defines a hedge fund as "an aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark)."

Seems the Willis observation of hedge fund participation in workers' compensation fits this definition precisely.

Yesterday I questioned whether utilization review, and other "cost containment" programs, were nothing more than new profit centers that add no value to workers' compensation claim management - and this Willis statement should be sending strokes of chill down the backs of anyone that really cares about the health of the system.

You can't tell me there's any altruism with investment in workers' compensation "ancillary services," and certainly much of the issue with claims mismanagement is tied to pure greed actually sending capital out of the system.

If there's anything the matter with workers' compensation it's this conflict between social obligation and financial return - and this is where the government must be particularly vigilant in regulation.

Anytime there is a captive market there is plenty of room for abuse, and the trend of increasing "cost containment services" expenses (which really should be called "profit enhancement services") should be an alarm to all state insurance and industrial relations departments; particularly California which represents over 20% of the total national market with a forecast $16 billion in premium to be written in 2015 and about half of a billion dollars per year being spent on "cost containment services."

"With policyholder surplus at record levels, insurers are increasingly in a position to compete for business on price," Keeping said in the statement. "With opportunistic capital continuing to show interest in the insurance sector, we wonder if the traditional cycles of hard and soft market might be changing."

I don't think the "traditional cycles" are changing. I think they are becoming more acute, and more volatile. Hedge funds and their investments in "ancillary services" is one reason why - because profit heading outside the industry trumps people to be served within the industry.

The full report is available here.


  1. Simple Rule, Follow The Money. To find out the TRUTH. Awesome, PS when is 20/20, or 60 mins, or one of the news shows going to report on what's REALLY happening in Workers comp? I know, never.... we are the media now. Rock ON! And thanks as always, for all of the work you all do, to get the truth of comp out their to all. We can not fix it, if folks can not agree it's broken. An with out the facts presented to them on a silver platter, they don't care if it's broken. So keep on dishes up the FACTS to us all. So as to educate the world on the truth and to help those folks injured on, or by their jobs. Peace

  2. David,

    Three years ago this past summer, I did my internship for my MHA degree with Broadspire in their Ft. Lauderdale area office. I worked on projects that looked at the utilization of Broadspire's services by their in-house adjusters around the country, as well as determining where their drug costs were coming from, either from pharmacies or physicians repackaging drugs. Unfortunately, the data I was given was not that specific, but I was able to see what each network was paying to each pharmacy and physician in two states, Florida and California. The other states would have required me to stay on into the next semester, or get a permanent position. But it was then that I learned about the various networks such as Coventry, Cypress Care, etc., and since then have seen them one by one being bought up either by each other, as in the case of Healthcare Solutions, or like Coventry being bought by Aetna, or by private equity firms and hedge funds. Thanks to Joe Paduda's reporting, we have seen these and other firms swallowed up by these vultures, and it does not take a rocket scientist to know why. You hit the nail on the head, as this was exactly what I realized and have mentioned in my writing. Good job!

  3. This is off topic, but it is on topic regarding The Laborers Grand Bargain Not being Valued in WA State. Sorry, but I had to share this. Like I do everything.
    May be the reason the unions do not stand up against the abusive workers comp system is be cause many are just un educated as to the real facts about it.
    Wow I just got this Email. And Im amazed. This lady told me I deminished her promotion, with my wanting to have her be a voice for LABOR, when all seem to ignore. Im sorry iv I devalued her work ethic, for I know how much I valued mine, before ya know what happened. WC and our broken system. I thought my labor council would be thrilled with the case and the truth about what is happening to labor in our current system that many are decieved by. So Im hoping she does not think this is just a personal grip of my onw..... For my friends this has been a battle for my life and lively hood, where others have not plaid by the rules. And we are proving this now, and we are also proving that this is harming folks mental health over the injustice so that a few hedge funds can be very very profitable for a very elite few.
    So Im amazed that a Washington State Labor Council Would not want to be out rage over what is going on by one class to another in our work comp system, and even now in our HMO's. Med Tort Laws are creating havoc and allowing men to do harm to others then hide behind med tort law, while those abused end up facing criminal for screaming in rage at the abuse being imposed upon them.
    OUR Council need to be their for all of labor even the injured.
    Darren Fonzseau I understand you have some sort of ax to grind, but spamming the state labor council's FB page is northern way to resolve you particular problem. I'm removing your posts from the current posting. Having been elected to the position of ILCA President was a high honor and your high jacking of the post has diminished it. I got you message prior to your incessant posts, I will being it to the attention of council leaders, but please stop using the WSLC page for your personal gripes. Kathy Garrahan Buell Cummings, Communication Director at Washington State Labor Official Snohomish County Labor Council

    How can they not see how this is harming our world. We even recently had a work comp related shooting in Nevada. 10 years the man told police, that the man he shot had been messing with him.... how can they not see that is just not good for folks mental health to go that long to seek justice in work comp claims. Arrrrrgggg.. but this Rebel does not use guns, I may spam, I guess it's called, but if that is what folks have to do to stop the abuse and oppression at the bottom, then I some spamming is the least of all our worries. Peace to all, and off to take some deep deep breaths now. No longer the Crazy One, Now Im the Crazy Hi Jacker. Hmmm? funny. What's a rebel with a white flag to do?