Tuesday, December 8, 2015

How Good It Is

Most of insured America doesn't know how good it is.

I'm talking about Market Competition for workers' compensation insurance.

And for that matter, most workers' compensation insurance companies don't appreciate how good they have it right now.

For Business America, market competition in the private work injury protection system means that if one company doesn't meet the expectations of the employer there likely is another source.

Since workers' compensation is viewed as a commodity by Business America, quality of service (unfortunately) takes a back seat to prevailing rates, and when coupled with various incentives, discounts and dividends or refunds, price sensitivity is heightened.

This puts pressure on the carriers.

In the past few years low interest rates that have hampered net financial results have been offset with increased rates, known in insurance parlance as a "hardening market."

A big component of pricing workers' compensation is the size of an employer's payroll. Despite increasing payrolls and decreased unemployment, premiums have not risen as fast as some thought.

According to insurance rating agency, AM Best, net written premiums for workers’ compensation increased to $46.8 billion in 2014, up 5.6 percent from $44.3 billion in 2013.

These observations are affirmed by NCCI.

The National Council on Compensation Insurance recently updated its projections for 2015, estimating that net written premium for workers’ compensation will reach $40.7 billion this year, a 5.7 percent increase from 2014. It would be the fifth straight year of growth and a record amount for the past 26 years. It’s also a greater increase than the 4.3 percent seen in 2014.

But rate increases have been slowing, turning into rate decreases for the first three quarters of 2015, company analysts said in a presentation yesterday, and companies want to retain their best accounts so they discount even further.

On average, according to Best, U.S. workers' comp rates have decreased 0.4 percent for this year’s first quarter.

That trend was affirmed by The Council of Insurance Agents and Brokers, which has also noted a softening of workers’ comp rates, as reported in its third-quarter market survey.

CIAB also notes that there are more carriers jumping into the market. It's not because of altruism though.

NCCI forecasts a combined ratio of 96 for 2015, down from 98 in 2014 and 103 in 2013.

Combined ratio is a very basic (and in my mind misleading) indicator of carrier health - it is simply a measure of dollars in and dollars out for any given period of time (and there are "policy year" as well as basic "annual" measurements): one dollar of premium versus X dollars of expenses and claims. If more is going out then the ratio is above 100. If less is going out then the ratio is under 100.

Since 1990, combined ratio has been less than 100 in only two other years: 1995 and 2006. In other words, this is one of the few periods in history that workers' compensation insurance companies are actually making an underwriting profit.

The reason underwriting profits are so rare in workers' compensation is because the system is designed that way - workers' compensation is a cash flow mechanism and insurance profits are to be derived from investment income obtained during the "premium float," the period of time between intake of premium dollars and outflow for expenses and claims.

The projected improvement in combined ratio is due mainly to projected increase in written premium volume, NCCI said.

Whatever the reason - carriers are picking a ripe plum, being that work comp is compulsory in most states and territories of the US. Captive markets are very enticing...

The Federal Reserve in the meantime is expected to start easing interest rates up, which means that Treasury Notes, the most conservative of investments due to the guarantee of the US Government, will start paying a bit more (albeit not much), which ultimately trickles down to the insurance market since conservative investments are favored by carriers and largely mandated by law.

And trickle it will be, because the rate increase is projected to be very modest, so investment returns won't be robust any time soon.

There is an inherent tension in workers' compensation insurance. In order for there to be a viable system, investors have to make money otherwise they will not be incentivized to fund it. But, the profit level needs to be kept in check because the insurance is mandatory, and Business America won't tolerate excess profits and will just "go bare," taking on the risk of non-compliance and financial ruin.

At the end of the day, though, there are only two salient requirements: that Business America has some avenue available to fulfill its mandatory obligations, and that Injured America is sufficiently protected with medical care and income support.

We have decided that it is up to The Market to make that happen. Right now The Market says there's money to be made by insuring the work comp mandate - they're drinking from a flowing fountain.

This is good for Business America because that means good competition for its premium dollars.

Now its up to Business America's management to make sure its employee assets don't have to use that insurance, but if they do, that those assets are protected to the extent that they are valued.

And ultimately, those assets will let Business America know if they feel valued or not.

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