WC: A Profit-Free Zone Again?

Arthur Larson, the late, great academic of Workers Compensation law from Duke University is probably turning over in his grave. How can a statutorily required line of line of insurance that comprises almost 20% of all commercial lines written premium in the US continue to remain in the “basement” when it comes to profits? The 117% combined loss ratio is almost 10 points worse than the 2010 WC result, and the poorest result in a decade for the beleaguered WC arena, with no surcease in sight.

With the virtual gutting of the economy (and by extension, the American workforce) in 2006 due to the collapse of the housing market, it has certainly been rough sledding for any insurance carrier heavily invested in WC. With unemployment remaining a major issue, the WC premiums have been in a soft pricing cycle. Significant rate increases in a down economy has proven to be problematic, and at a time when substantial investment income has all but dried up for the carriers.

So what's the outlook for 2012 and 2013? Not much better. Without a hardening of the market in terms of increased premiums, Fitch avers it will be an all but impossible task for WC to display even a 110% loss ratio (an “improvement” of 7 points over 2011). 

Reserve deficiencies in the WC line (a statistical trend from 208-2010), is another major area of concern that has an impact on profitability. Inadequate reserving ultimately affects pricing by masking probable ultimate cost. If financial loss expectations are inaccurate through under reserving, premium calculation off of the understated reserves will be insufficient.

Though this news is far from salutary, it cannot be totally unanticipated.  Premium levels have been soft over the last 5 years in virtually all commercial lines, but even more so in WC. So what's the answer?

There's profit to be made even in a soft market.  This is where the true art of underwriting (rather than pricing) comes into play. The risks must be chosen carefully, and proper premium obtained.  Active Loss Prevention assets and a proactive Claims Department are also part of the equation for financial success. These steps were pro forma several decades ago when WC was seen as something other than a simple commodity. When the line began to be dominated by a drive for market share and gross premiums (regardless of the exposure presented by the risks), profits began to vaporize.

WC is a line of insurance that employers are required to have. If it is underwritten correctly, priced right, and actively managed with Loss Prevention and Claims personnel (who have enough time and latitude to do their jobs), it should again yield a profit, even in these times.            

About the Author:

John D'Alusio has over 30 years experience in P/C insurance with executive management positions in administration, field operations, and claim technical areas. Mr. D'Alusio has had many articles published in industry periodicals, and is also a contributing author to the LexisNexis published, “Complete Guide to Medicare Secondary Payer Compliance.”  He writes a monthly column for Risk & Insurance Magazine and is a quarterly columnist for AMComp Magazine.

His Risk & Insurance column is located at:
http://www.riskandinsurance.com/workerscomp.jsp

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