NCCI: Insurers Look to Improved Underwriting to Compensate for Lower Investment Returns

Boca Raton, FL (WorkersCompensation.com) – Profitability, the impact of loss costs, and the regulatory environment are among the top concerns of workers’ compensation insurance executives. NCCI annually asks its member carriers to weigh in on the issues impacting them. For the second consecutive year, the organization issued a Focus on 5 list of the top concerns. 

“When I looked at the two lists, it’s rate adequacy, the changing workforce, medical costs, technology, and the new one was the gig economy. I looked at these two and said, ‘why aren’t they very different?’” said Bill Donnell, president and CEO of NCCI. “I believe that we work in a line with a very long tail and trends tend to play out over a longer period of time. So I think that’s part of it … I think in the next 5 to 10 years there will [still] be concerns about profitability and premium.”

The Florida-based ratemaking and research organization surveyed 100 executives to identify their top concerns and what they are doing about them. Persistently declining loss costs are among the more dominant themes expressed.

Whether loss costs will continue to decline is anyone’s guess. Donnell speculates it will depend on a couple of issues in particular.

“When I look at the drivers of the current favorable results coupled with loss cost declines it’s pretty simple; we have this long term frequency trend, which has shown reduction of injuries. We look at it over long period of time. Every year with one exception there has been a decline,” he said. “The Second dynamic is medical inflation.”

Medical inflation was a major cost driver in the early 2000s, when it outpaced overall inflation. The last decade has seen medical cost inflation muted.

“So I’d say, it depends,” Donnell said, “in part on the long term frequency trend, and in part on medical inflation. Will it remain muted or become a different trend line, [as it did] in the first part of this of the century.”

One thing that has changed in the past few years is how carriers are working to ensure profitability. Low interest rates have rendered the investment side of the equation far less important than underwriting performance.

“I see a lot of attention to quality underwriting; recognizing underwriting matters. It matters every day, but it matters an extra amount when you have the situation we have now,” Donnell said. “Contrast that with late ‘90s; higher interest rates, investment returns were higher. Decisions were made – ‘we can have two streams of income.’ They realized they could make a lot of profit on the investment side.”

Changing Workforce

The evolving gig economy is being closely watched by insurers as they monitor legislative activity and court decisions. Some larger companies have established research teams to keep tabs on the issue. Companies are toying with the idea of alternative coverages.

“There is some limited medical coverage that it not unlimited like it is in workers’ compensation, or limited disability coverage that has nothing to do with their income. They are putting these together and looking at it as a potential market,” Donnell said. “It’s important to note this is not workers’ compensation as we know it. It’s an important distinction, workers compensation vs. worker injury. I’m making the assumption that someone has made the determination they are an employee vs. a contractor. If they are a contractor, they have no workers’ compensation coverage.”

Another change in the workforce concerning insurers is the impending exodus of baby boomers. That may have a specific impact on the workers’ compensation industry.

“Workers’ comp I’ve found has a very core group of people passionate about the line and have been at it for a long time,” Donnell said. “Our Annual Issues Symposium last year was our 30^th, and some people said it was the Woodstock of workers’ compensation. People are very focused on it, they love talking about it. So it’s a big issue.”

Key to the success of companies going forward is what he calls “purposeful knowledge transfer;”  understanding why certain decisions were made.

“Someone will say, ‘why do we do it this way?’ They look for ‘John’ who’s been there for 30 years and ask him,” Donnell said. “When John is gone, there is no answer. So knowledge transfer is important.”

Companies can also become more open to alternative work arrangements. “Somebody 65 doesn’t need to retire; they can go from five to three days or two days [a week], so they work another couple of years and it’s a better outcome. You can use those extra years to transfer knowledge,” Donnell said. “I am hopeful we’ll get out in front of this. When I bring this up, they all are passionate about it and they get it. That’s my hope. It is something that is playing out.”

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