High Medical Costs, Big Losses Hinder Workers’ Comp Market

Workers’ compensation, affected both by the capacity shortage across commercial lines after Sept. 11 and ever-increasing health insurance costs, remains an extremely difficult cover to place, and is likely to stay that way for some time.

Major insurers still active in workers’ comp lines are finding it less and less lucrative. Earlier this month, A.M. Best issued a report showing a substantial increase in rating downgrades for the second year in a row; surprisingly enough, the terrorist attacks of Sept. 11 were not named as the major factor for the downgrades. Rather, A.M. Best cited prior accident-year loss reserves for carriers exposed to workers’ comp and medical malpractice lines, among others, as the primary reason for so many actions. Specifically, the report indicated the number of companies rated “B+” or higher—secure, that is—decreased to 84.3 percent of all ratings in 2002 compared to 85.6 percent in 2001. Also, the number of carriers rated superior (“A+” or higher) fell to less than 10 percent of all ratings for the first time in five years.

Fatalities down
The Texas workers’ comp market is, it seems, is not bucking the trend. High health care costs, dwindling numbers of carriers, and high premiums have resulted in a state fund, Texas Mutual Insurance Company, writing nearly 20 percent of business.

A recent report by the Texas Workers’ Compensation Commission (TWCC), however, indicates at least one circumstance that presumably could help allay the situation: steady declines in workplace fatal injury rates. But it has yet to be determined whether these numbers foretell significant declines in costs over the next several years.

TWCC’s Census of Fatal Occupational Injuries (CFOI) Program, which collaborates with the U.S. Bureau of Labor Statistics to amass annual occupational fatality information, takes measure of private and public sector fatalities using death certificates, news reports, workers’ comp records, and federal and state agency reports.

The study indicated a 7 percent decrease in fatal workplace injuries, 534, for 2001. The TWCC report showed 121 fatalities in the Texas construction industry; the transportation and public utilities industry came in second, with 80 deaths. However, the construction industry also reported a 20 percent decrease in fatalities for 2001 compared to 2000. Other industries reporting significant declines included retail and wholesale (17 percent) and agriculture, forestry, and fishing (12 percent). The mining industry, conversely, reported a 30 percent increase in fatalities for 2001. The report notes that deaths in that industry have been climbing for some time—they increased 130 percent from 1999 to 2000 alone.

Other factors affect capacity
While a decreasing incidence of workplace fatalities seems encouraging, it cannot stabilize the market on its own. John Gantz, president of the Argonaut Group’s Argonaut Insurance Company (AIC) unit, noted other factors more acutely affecting the workers’ comp market: “It certainly is a positive development, but I think what’s been more difficult has been the adverse claims climate and increasing medical costs in Texas.”

Gantz explained how AIC’s diligence has led to relatively stable experience for the company in the state. “Our experience, actually, has been fairly stable,” he said. “It’s an important state for us, obviously, and our success has been largely attributed to the fact that we take a very proactive view toward safety and claims management, and the need to focus on clients who really demonstrate a commitment to that. I think that’s what has paid off for us, but I think there are still other issues in the state that create potential for adverse developments—medical trends in Texas are more severe than in other parts of the country. I think it’s something that we need to continue to watch.”

With state elections in a matter of days, homeowners and medical malpractice insurance coverages have become key issues in many campaigns. But Gantz pointed out that workers’ comp hasn’t received the same attention from candidates. “I think (workers’ comp) is too different an animal in that respect,” he said. “Obviously, workers’ compensation costs have to be watched because industry investment in the state is more frequently, these days, dependent on the state’s competitiveness and how well it’s controlling workers’ compensation costs. To that extent, it’s a part of the whole investment environment.

“But having said that, I think it’s a totally different picture than what’s going on in the medical malpractice field, the homeowners field, and in the residential construction field,” Gantz explained.

“I think it’s important that the state and the industry work together to keep a close eye on medical costs, and manage those trends appropriately,” Gantz said. “It’s important that the state and the industry work together in making sure that there’s rate adequacy against those trends, so that we can continue to provide a stable marketplace. We need to keep those things under control, and those organizations that do a better job on that, and reduce the incidence of loss, are going to be in the better position of supporting their corporate clients.”

Topics Texas Profit Loss Workers' Compensation