The 'silver-linings' portfolio
Writing workers’ compensation in the US is not for the faint of heart. Plagued by strict regulations and razor-thin profit margins, the line has wallowed in a perpetual state of ballooning costs and decreasing rates. Regulation that changes state by state adds an additional layer of complexity for anyone looking to write outside of their home state. However, while some brokers see workers’ compensation as an albatross—a punishing drain on resources that will never improve or go away—others are optimistic about the line’s direction for the first time in years.
According to Bruce Hockman, who has been involved with workers’ compensation since 1970 and now works as an executive vice president and workers’ compensation practice leader at Towers Watson: “Workers’ compensation, probably more than any other line of business, has its own characteristics that require someone to make a long-term decision to get into it. It’s not merely choosing to do the business—it’s where you choose to do it that is the crucial business decision.”
Hockman sees the line as a constant and as the largest commercial line of business, workers’ compensation is a cornerstone of the industry that could be on the verge of change. But it’s safe to say that challenges will remain, and not everyone is feeling quite as optimistic.
Scott McGee, executive vice president of commercial property and casualty at US insurer RCM&D, is of the mind that the only acceptable reason to write workers’ compensation is to leverage it for other lines. “You lose any kind of advantage when you won’t offer that particular line of coverage,” he said. “The challenges are that an individual carrier can’t really swing the rates up enough to make some accounts profitable, and there are also various states with state funds that traditional carriers can’t compete with.”
"The extension of healthcare coverage into the non-occupational area could well remove that element from worker's compensation policies, leaving health coverage to the state."
Performance also varies radically between states. New York and California—the two states with the largest share of the market—have been notoriously poor performers. According to Hockman, bad results in those two states—which are “better, but still not acceptable from any level of profitability in the line”—skew the combined ratio for the entire country and raise concerns about the line as a whole.
In addition, workers’ compensation is incredibly data and capitalintensive. Regulators require detailed records and individual claims candrag on indefinitely. As Hockman outlined, “As bad as property is— and we continue to see just how bad it can get—in relatively short order you know what your losses are. If a house goes down, you know what the house was valued at and so you know what your loss is. In workers’ compensation the losses are paid as long as an injured worker remains disabled, and that could be for life.”
Several recent developments may yet signal that rates are on the mend, and Hockman predicted that combined ratios will improve nationally— although not for all writers or in all jurisdictions. For the appropriately dedicated insurer and reinsurer however, workers’ compensation can be a fulfilling speciality and presents valuable opportunities for partnership.
A line in transition
A series of changes have coalesced into this more optimistic future for the line. According to Hockman the industry has four major developments to thank for the potentially positive news.
The first factor—and perhaps the most obvious—is the steady improvement of the US economy. “Any time we have more people working and wages increasing there is an opportunity to generate some additional top-line revenue. We hadn’t had that for about five years going into 2011 and 2012, so that was a positive sign,” Hockman said.
In addition, various rating organisations in most of the states made increased loss cost filings that have since been approved. These have enabled the markets to move pricing into a slightly more profitable vein.
And despite rising healthcare costs—a major issue, according to Hockman, which must be watched carefully by the industry—the frequency of claims is falling. “Medical inflation can only affect a loss if it happens,” he said. “The extent that frequency has been going down has been very good for the line generally.”
"The market may be limited, but the complexities of workers' compensation ensure that those reinsurers that manage to find their way in have the opportunity to form strong business relationships."
This is all good news, but it’s the Patient Protection and Affordable Care Act that could prove revolutionary. The implementation of ‘Obamacare’ will be the first attempt in the US to bring an entirely new class of workers—those whose employers don’t offer health cover—into the health insurance system. Hockman acknowledges that it will take time to see exactly how the influx of the previously uninsured will change existing cost structures, but the transformation could be more drastic for workers’ comp than would first appear.
The extension of healthcare coverage into the non-occupational area could well remove that element from workers’ compensation policies, leaving health coverage to the state. Hockman referenced a recent study carried out in Vermont—where near-universal healthcare has existed for some time—the results of which suggested that taking the medical portion out of workers’ compensation policies and blending it with the non-occupational health coverage would benefit insurer, state and claimant alike. Similarly, a 2012 study conducted by the RAND Corporation in Massachusetts found that “reform may actually reduce medical costs borne by the workers’ comp system” by between 5 and 10 percent without increasing costs or other factors such as the length of hospital stays.
“That is an extraordinary change if it goes into play in the workers’ compensation arena. There are a lot of reasons why it won’t, but if that catches hold, it will forever change the landscape of workers’ compensation in the US,” Hockman added.
A rare bond
While primary workers’ compensation coverage teeters on the edge of what could be a revolution—or, as easily, something far less significant—all is quiet on the reinsurance front. Demand for reinsurance protection has always been relatively low in workers’ comp. As McGee concisely put it: “There’s not much reinsurance in standard workers’ compensation. Most of the time reinsurance is bought in the excess for particularly loss-sensitive programmes.”
For those exposures that do warrant reinsurance coverage— multiperson losses, excess of loss on a per-person basis and surplus relief— slow losses have tempered need. Excess of loss per-person continues to be case-specific, the need for surplus relief has been slow and on the catastrophe side—where Bermuda really shines—all has been quiet since 9/11. Hockman said, “These are multiple person losses, and the good news is that since 9/11 we have not had to face any significant loss emergence in workers’ compensation in the US, unlike the natural hazards that we’ve been dealing with on the property side.”
The market may be limited, but the complexities of workers’ compensation ensure that those reinsurers that manage to find their way in have the opportunity to form strong business relationships. According to Hockman, an ideal reinsurer will have an on-the-ground understanding of workers’ compensation and sensitivity to the way their primary partners go about their business. While some insurers will see workers’ comp as their bread and butter, others—due to the nature of their portfolio—can’t afford to be workers’ compensation specialists. It’s imperative that a reinsurer understands the difference— and how best to provide support accordingly. For those willing to invest time and energy into building expertise, a potentially lucrative partnership awaits.
“We have a mature market with a mature product, and the differentiation comes back to the companies who find a way to use all of the tools to their advantage to help their insureds control losses, stop them from happening in the first place and mitigate the losses once they occur,” Hockman indicated. “The reinsurers who understand those differences tend to stay in the line for a long time, tend to be very profitable and tend to make extraordinary partners for the people who rely on their capital.”
Workers’ compensation, already a challenging line, faces an uncertain future. But for those who can roll with the punches, the only way left to go is up.