Will the Soft Market Turn To Mush?

The workers’ comp insurance market has always cycled, going from soft (insurance is cheap, carriers are competing hard for business) to hard (insurance is expensive and fewer insurers are in the market.

Those days are over – or at least suspended for the foreseeable future. The current soft market won’t end anytime soon, and will likely soften even further.  Two realities inform that statement; the yet-to-be-accounted-for drop in opioid usage, and the high profits generated by workers’ comp insurers.

A combination of high employment and the continued structural decline in frequency have been considered the key drivers. Another driver – one I’d argue is much more important, is the precipitous decline in opioid prescriptions. All credible research indicates opioid spend has dropped dramatically over the last several years. CWCI’s recent analysis shows the percentage of lost time claimants prescribed opioids was cut in half from 2008 to 2017; CompPharma’s research indicates a decline of 40% in opioid spend over the last two years.

What is just now starting to register is the impact of this decline on claims costs. CWCI estimates the opioid reduction has reduced benefit costs by $6.5 billion over that decade; that reduction appears to be increasing at a rapid rate.

At the risk of gross over-simplification, work comp rates are based on an analysis of historical claims costs. Actuaries and rate-makers project future claims costs – and future premium rates – primarily on that history. [Other factors including regulatory changes, worker income, etc. are also considered.] However, models relying on several years of historical data that do not differentiate between quite different types of claims may well fail to accurately forecast future claims costs.

I would suggest the dramatic impact of opioid reduction on claims costs is A) not fully understood and B) not accounted for.

Add to that the huge profits currently being generated by the work comp insurers, all of which want to grow their business.

This leaves us with a lower cost-of-goods sold (comp rates are too high because we aren’t factoring in lower claims costs due to opioid reductions) coupled with an abundance of supply (insurers all want to write a lot more workers’ comp).

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