Record Premiums, But Some Challenges for Workers' Comp Insurers, Study Says

Sarasota, FL (WorkersCompensation.com) - Workers’ compensation insurers posted a record high in direct premiums written last year, but a rating agency sees some issues in the sector, according to a recent report. 

Insurers, on the other hand, see their current situation as a routine part of a regular business cycle.

Last month, the A.M. Best Company, which provides credit ratings and financial data to the insurance industry, issued a special report noting a deceleration in year-over-year workers’ comp premium growth. The A.M. Best study comes as a number of states across the country, with guidance from the National Council on Compensation Insurance (NCCI), are setting lower rates for workers’ compensation insurance.

While the workers’ comp sector reported “a record high $58.5 billion in direct premiums written in 2016,” that number was posted as “net premium growth declined to 0.2 percent after expanding at a five-year compound annual growth rate of 6.3 percent from 2010 to 2015,” according to a news release on the report.

The release also notes A.M. Best’s concerns that workers’ comp insurers as a group are operating with insufficient loss reserves, money set aside as an insurer’s estimate of the cost of future claims on policies, it writes.

“Although loss experience has improved in recent years, “ the news release notes, “…Best believes that reserves for the workers’ compensation line remain deficient.” A.M. Best estimates the deficiency at approximately $22.1 billion as of the end of 2016.

“According to the report, loss reserve adequacy is especially important for this line because of the long-tailed nature of the line’s liabilities,” the news release states, referencing the fact that payments for treatments and therapies in workers’ compensation claims can stretch for considerable periods of time.

“Since adverse reserve development is one of the leading causes of insurer insolvency, reserve adequacy remains a critical component of the credit rating process,” per the release.

Jackie Lentz, director at A.M. Best, said the report’s reference to reserves reflects the company’s desire for conservative behavior on the part of insurers.

“We want them to be responsible. We want them to reserve prudently,” she said.

A.M. Best indicates some large insurers have been decreasing their participation in workers’ compensation, and the news release goes on to say that “workers’ compensation insurers remain under pressure due to decreasing rates and increasing competition.” Some of that competition is coming from outside the sector, according to Carl Altenburg, in the form of self-insurance programs and other options. Altenburg is a senior financial analyst at A.M. Best.

“The pie is possibly shrinking,” he said.

Trey Gillespie, assistant vice president for workers’ compensation at the Property Casualty Insurers Association of America, a trade association, acknowledged in an interview this week with WorkersCompensation.com that the A.M. Best report does “show some shifting” in the workers’ comp line.

But, Gillespie added, the report is also “recording a fairly stable market.”

Workers’ comp insurance typically moves in cycles of five to six years, Gillespie said. The cycle is fed in part by loss ratios, the difference between the ratios of premiums paid to an insurance company and the claims settled by the company. As loss ratios rise, Gillespie explained, “the market hardens.” 

Last year’s loss ratios were favorable, Gillespie said, but he conceded the A.M. Best analysis reflects “some deterioration” in those ratios.

Overall, though, Gillespie said he sees current conditions for workers’ comp insurers “more as the natural course of business” than any indication of a lasting downturn.

Across the country, legislative action in a number of states has resulted in lower workers’ compensation insurance premiums. Lentz told WorkersCompensation.com that workers’ comp is a highly regulated line, and insurers “are very active in monitoring legislation.”

In New York, premiums dropped by 4.5 percent effective Oct. 1, when the state’s Department of Financial Services approved a rate decrease recommended by the New York Compensation Insurance Rating Board. 

The new rate follows last year’s 9 percent premium increase, and is credited in part to reforms approved by lawmakers earlier this year. Those reforms include the establishment of a drug formulary, limiting temporary workers' compensation benefits in advance of permanent benefits, and updating medical guidelines.

The Business Council of New York State is enthusiastic about the reforms. A statement on the council’s website read in part that “New York's employers will now stand to save hundreds of millions of dollars annually on their workers’ compensation costs.”

There is a similar story in California, where the focus of a Thursday public hearing by the California Department of Insurance was a rate filing by the Workers’ Compensation Insurance Rating Bureau (WCIRB), which proposed advisory pure premium rates averaging $1.96 per $100 of payroll effective Jan. 1, 2018.

Insurers writing workers’ comp policies in California are not bound by the advisory premium rates, but according to the latest annual report from the WCIRB, written premiums from workers’ compensation insurers in California for this year are expected to be flat, at $18.1 billion, the same as last year, according to a recent Insurance Journal story.

The WCIRB’s latest annual report indicates that premiums had steadily risen in California since 2009, when they stood at $8.8 billion.

As in New York, the change is attributed to a workers’ comp reform law, passed in 2012. The law has driven down average insurer rates, which have dropped 15 percent since 2015, according to the WCIRB.

In Illinois, NCCI is recommending a 10.9 percent decrease in workers’ compensation rates for 2018, although insurers writing policies in the state aren’t required to follow those recommendations.

Since 2011, when state legislation cut workers’ compensation benefits, premium decreases recommended in Illinois have totaled 36.5 percent. Those legislative changes cut medical fee payments by 30 percent and allowed employers to limit injured workers’ choices of medical providers.

Commenting on legislative interest in workers’ comp, Gillespie said Wednesday that state lawmakers “are always interested in job creation.”  Ensuring a stable workers’ compensation market can help attract new industry and business or retain existing enterprises in a state, Gillespie suggested.

Labor groups, though, have a different view.

The New York State Workers’ Compensation Board last month released a set of proposed new regulations for workers’ comp that would drastically reduce payments to workers who suffer diminished use of limbs, increase requirements for injured workers to show future earning capacity would be diminished, and make it more difficult for workers to contest their award.

The proposed regulations, the result of state legislation earlier this year, have met resistance from labor interests.

New York AFL-CIO President Mario Cilento told the New York Daily News recently that the plan “is an insult to all working men and women. Benefit cuts for injured workers are wholly unjustifiable.” 

The workers’ comp board is taking public comment on its proposed regulations until Oct. 23 and is expected to adopt a final set of rules by the end of the year.

A call to the AFL-CIO’s national office in Washington, D.C. seeking broader comment on workers’ comp legislation nationwide was not immediately returned by press time.

Gillespie took some issue with the suggestion that legislative interest in workers’ comp could compromise the quality of care for injured workers. State governments are interested in making the delivery of benefits more certain and predictable, Gillespie said, and in ensuring that workers return to the job quickly, rather than turning to public assistance programs for longer-term help.

Steve Bennett, associate general counsel for the American Insurance Association (AIA), a trade group, declared workers’ compensation lines healthy, via an email to WorkersCompensation.com.

“Thanks to a number of effective reforms, especially those that help control medical costs, the workers’ compensation industry is quite healthy,” Bennett wrote. “AIA’s number one goal continues to be that the injured worker receives the highest quality and most appropriate medical care to foster prompt recovery and a timely return to work.”

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