The Shrinking Market

WorkCompCentral correspondent, Peter Rousmaniere, recently did an analysis of injury frequency rates by state and projected those declines out to the future, calendar year 2024.

SUMMARY
Here's the bottom line for those who's attention spans are as short as mine: The insurance of work place injuries is a shrinking market, unless those that do the insuring raise their fees.

In other words, despite continued improvement in safety, ergo frequency and severity, the work comp industry is a money loser due to its own initiatives.

This is good, and this is bad.

This is good, because the ultimate outcome, a safe work environment, is the product of the industry’s relentless push to reduce frequency.

But in the bigger scheme of the world, this is bad, because the industry as it is currently structured is not a sustainable business model. Which leads to incongruity, and ultimately deceptive practices that undermine the entire system (evidence of which we see in all sorts of sub-sectors: UR, BR, IMR, etc ad nauseum).

ANALYSIS

The first table uses employment figures for 2015 and 2024 and projects, by state, the change in work injuries by 2024 assuming a 2.5% annual reduction in frequency (for comparison, NCCI pegs it at 4.3% since 1990).  Huge declines are due to workforce population declines (see Michigan, for instance). Even states with a growing work population are going to see injury reductions.

The second table uses a 2012 - 2022 workforce projection, which was used for the Seismic Shifts special report.  It looks at Lost Time Compensable injuries, which means that each of about 100 occupations studied (about 2/3 of the entire workforce) has is own LTC frequency estimate based on BLS injury data by occupation. The table shows the reduction in LTC injuries with a 2.5% annual reduction in frequency (again, NCCI averages 4.3%). The table also shows the percentage of LTC injuries that would occur without safety improvements in 2022, by two categories: technology improvement sensitive (vehicles and material handling) and construction-oriented jobs.   

2015 – 2024 projection of work injuries with safety improvements 

The left hand percentage is the change in the size of employment. The right hand percentage is the change in the number of work injuries at a 2.5% frequency improvement per year.

	Employment	Work Injuries
	2015 -2024	2015 - 2024
United States	4.8%	-15.2%
Alabama	-2.0%	-22.0%
Alaska	2.3%	-17.7%
Arizona	13.3%	-6.7%
Arkansas	0.6%	-19.4%
California	7.5%	-12.5%
Colorado	17.7%	-2.3%
Connecticut	-7.0%	-27.0%
Delaware	5.0%	-15.0%
District of Columbia	34.4%	14.4%
Florida	16.1%	-3.9%
Georgia	8.1%	-11.9%
Hawaii	6.0%	-14.0%
Idaho	6.8%	-13.2%
Illinois	-5.5%	-25.5%
Indiana	-1.0%	-21.0%
Iowa	0.6%	-19.4%
Kansas	-0.9%	-20.9%
Kentucky	-1.3%	-21.3%
Louisiana	3.5%	-16.5%
Maine	-10.5%	-30.5%
Maryland	4.3%	-15.7%
Massachusetts	4.3%	-15.7%
Michigan	-6.8%	-26.8%
Minnesota	1.9%	-18.1%
Mississippi	-3.4%	-23.4%
Missouri	-3.0%	-23.0%
Montana	2.2%	-17.8%
Nebraska	4.6%	-15.4%
Nevada	15.9%	-4.1%
New Hampshire	-7.1%	-27.1%
New Jersey	-0.8%	-20.8%
New Mexico	-5.7%	-25.7%
New York	-0.3%	-20.3%
North Carolina	6.7%	-13.3%
North Dakota	21.1%	1.1%
Ohio	-5.6%	-25.6%
Oklahoma	6.9%	-13.1%
Oregon	6.0%	-14.0%
Pennsylvania	-5.2%	-25.2%
Rhode Island	-6.0%	-26.0%
South Carolina	7.4%	-12.6%
South Dakota	7.8%	-12.2%
Tennessee	4.1%	-15.9%
Texas	21.9%	1.9%
Utah	20.4%	0.4%
Vermont	-8.7%	-28.7%
Virginia	6.6%	-13.4%
Washington	10.6%	-9.4%
West Virginia	-9.1%	-29.1%
Wisconsin	-3.9%	-23.9%
Wyoming	3.7%	-16.3%

2012 - 2022 injury analysis

This table reflects Lost Time Compensable injuries for 2012 and 2022, based on employment projections. No net change due to inter-sector employment shifts is found. 

LTC 2012:				669,230
LTC 2022:				745,325
% change, no safety improvements:				11%
est 2022 at 2.5% freq reduction / year				506,821
% of LTC injuries 2022, no safety improvements:
Technology sensitive (vehicles, material handling)				34%
Construction oriented				16%

WHY WORK COMP INSURANCE IS NOT SUSTAINABLE
There are several factors at work against the current workers' compensation insurance business model.

The first, and foremost, as pointed out by Rousmaniere's analysis (and corroborated by Berkeley research Frank Neuhauser), is that the work place is safer and safer and safer.

Which means, of course, there are fewer - indeed FAR fewer - injuries or deaths to insure against than when The Grand Bargain was first negotiated.

And the declining frequency trend means that at some point work injuries/deaths will be, essentially, negligible, which will drive employers to question why workers' compensation, at least in its current mandatory format; i.e. why can't employers formulate some other work injury protection scheme without the overhead, bureaucracy, intrusion and imposition of current state workers' compensation plans since the need isn't so great.

In other words, regardless of the current foment against the nascent "opt-out" movement, eventually the industry is going to have to come to real terms with the reality that it, as in workers' compensation insurance, will become displaced.

The industry is disrupting itself.

The only defense workers' compensation insurance has against this ultimate threat is to make it cheaper, but that won't happen in today's environment, against the long term sustainability of the line, because there is no panic yet.

Indeed, a couple of years ago, at the start of the current "hard" market, then NCCI president Stephen Klingel in his State of the Line address essentially said that there was no good reason that carriers are able to sustain rates and premiums at current levels other than the fact that they could - i.e. employers haven't yet awoken to market realities.

But they will...

What demands does an employer have the right to ask from a vendor (in this case, a workers' compensation insurer) who sells a product that the vendor knows can be a lot cheaper - but the vendor doesn’t make a full effort to make it cheaper?  These are generally relationships that go on for years.

Are insurers really competing on keeping prices low but reducing their “cost of business”, which is injuries times the cost of the injuries?

When I hire a contractor or lawyer, aren’t I implicitly expecting that the vendor will take care, if only for competitive reasons, to be economical, such as avoiding unnecessary work? Should not this expectation also apply to the vending of workers' compensation insurance?

But in the short term, as the workers' compensation insurance industry adjusts to the fatal reality that there soon won't be anything to insure, a couple of trends are apparent:

1. increased competition and consolidation of workers comp industry participants.

2. increased exploration of transitioning into related fields.

3. great attention to vehicular and materials handling technology that lowers work injury (see #2).

The State Fund of Minnesota decided to invest in an injury reducing technology firm. Sure, this could lower premiums for its subscribers, but more importantly lowers cost to the insurer.

Eventually, though, the employer market is going to demand those savings be returned, or at least demand an accounting of where the money is going and, absent that, demand alternatives.

And carriers can't blame medical inflation anymore for sustained premiums - the industry's constant barrage against the medical industry has inflation way below what general health experiences.

The effect on the industry's market (i.e. employers) and the industry itself will be like how we notice changes in local real estate use - we don’t notice it until suddenly we do.