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Workers comp sector adapts to changing times

Posted On: May. 24, 2017 10:25 AM CST

ORLANDO, Fla. — Themes of workers compensation market stability were contrasted with a call for adaptability in the face of a changing comp environment at the National Council on Compensation Insurance Inc.’s Annual Issues Symposium.

During his opening address to a packed ballroom last week in Orlando, Florida, Bill Donnell, president and CEO of the Boca Raton, Florida-based workers comp research and ratings organization, introduced “adapting” as the word and theme of the sold-out conference. The industry, he said, must remain open to new ideas and processes to stay relevant in an atmosphere of rapid change, largely driven by technology.

Financial roundup

NCCI’s chief actuary, Kathy Antonello, followed with a presentation of NCCI’s State of the Line report, which annually provides an overall picture of the industry’s health. The workers compensation combined ratio for private workers compensation insurers during calendar year 2016 was 94%, driven by a decline in frequency paired with increases in indemnity and medical severity, Ms. Antonello said in a statement accompanying the report. Total market net written premium volume remained steady from 2015 to 2016 at $45.5 billion, according to the report.

“The workers compensation underwriting results for 2016 were very strong, especially relative to other property and casualty lines of business,” Ms. Antonello said. “While faced with continued, historically low interest rates, the industry seems to be responding with diligence on the underwriting side.”

The workers comp combined ratio on an accident-year basis for 2016 was 98%, according to the report.

Other trends highlighted in NCCI’s report include an improved overall reserve position for private insurers, estimated to be a $5 billion deficiency at the end of 2016, which is down from $7 billion in 2015, aided by reserve redundancy in accident-year 2016, NCCI said. In addition, average lost-time claim frequency in NCCI states declined by 4% last year on a preliminary basis, and average indemnity claim severity increased 4% from 2015, the council said. The workers comp residual market pool premium volume remained flat from 2015 to 2016, and the average residual market share remained stable at 8%, NCCI said.

Political headwinds

Ms. Antonello noted that while the industry responds to evolutionary changes, it also must respond to sudden changes that can bring uncertainty to the comp industry, including most recently the impacts of Brexit and the 2016 U.S. presidential election.

Kurt Karl, New York-based chief economist with Swiss Re Ltd., said the U.S. economy is likely to grow this year, with a low probability of recession. Mr. Karl outlined some of the macro economic challenges impacting both the U.S. economy and the workers comp market, including a commodity price bust and a slowdown in productivity growth driven by a shift in the job mix from manufacturing to services. A slowdown in trade growth is also creating economic headwinds, he said.

For the insurance sector over the next year, Mr. Karl predicted liability claims will accelerate, eroding reserves and boosting demand for reinsurance. Wage inflation is expected to grow, which will drive workers comp claims cost growth up, while unemployment continues to decrease. Inflation will trend up and interest rates will continue to increase, he said. 

Medical expenditures have experienced a big jump but are expected to remain stable going forward, Mr. Karl said. A small uptick in fatal occupational injuries, especially in transportation, is slightly impacting claims costs, he said.

Potential for growth

Mr. Karl predicted moderate growth in the workers comp sector, driven by the robust construction industry, the mining industry, which has experienced a turnaround driven by fracking operations, and the services industry, especially transportation. Auto production is flat, and manufacturing, while recovering from the recession, faces a long-term decline as jobs are replaced by machines, which will dampen premiums from that sector, he said. 

David Hollander, Philadelphia-based global insurance advisory lead at Ernst & Young L.L.P., further delved into the impact of technology on the financial and insurance industries on day two of the conference. Technology, he said, will create a wide variety of opportunities in the comp sector, including by improving workplace safety, increasing interest in healthy living enabled by technology, harnessing an explosion of valuable new data generated by sensors and wearables, and creating efficiencies with developments like blockchain. In addition, he said technology could automate between 30% and 50% of the work in the insurance industry, freeing up employees to concentrate on more profitable tasks.

“Technology is the one thing causing more change than anything,” he said. “Washington will probably never have the impact on your life or your kids’ lives that technology will.”