For Workers’ Comp Writers, 2004 May Be as Good as It’s Going to Get

After years of depressed pricing and a soft workers’ compensation market, prices are on the rise in many parts of the country, a trend analysts predict will continue through at least this year and probably next. The good news is that workers compensation writers are for the most part turning a profit as rates in many states continue upward.

On the flip side, many insurers still haven’t faced up to their reserve deficiencies, according to analysts.

Also, employers have been raising enough of a stink to move workers’ compensation front and center politically in California, Texas, Tennessee and other states.

The market for workers’ compensation, like most lines, has hardened due to a range of factors, including increasing medical costs, several years of inadequate pricing, the terrorist events of 9-11, falling investment yields and an across-the-board tightening of insurance industry backstops like surety and reinsurance. In many cases, reinsurance costs have doubled as this industry licks its wounds from 9-11 and the debacle that was the Unicover Managers Inc. workers’ compensation reinsurance pool, which ruined many carriers and the ghosts of which still haunt the industry.

“Overall, the workers’ compensation industry is improving,” said Robert Farnam, senior analyst at A.M. Best Co. insurance rating agency.

“Companies have reported their best results in years. For now, pricing increases exceed loss cost trends.”

In other words, insurers are turning a profit, after about three years of barely scratching out a living in most parts of the country. Since 1999, the road has been riddled with the dried bones of now defunct workers’ compensation carriers.

Rates are up in many states. California has attracted its share of attention due to its size (estimated at $18 to $20 billion in aggregate workers’ compensation premiums) and the virtual doubling of premiums for many employers in the state.

But California is not alone in shouldering significant increases. Tennessee employers are feeling the pinch as the National Council on Compensation Insurance (NCCI) last year filed for an average rate increase of more than 23 percent for the state’s assigned risk pool. NCCI also filed for an average increase of almost 8 percent for the rest of the state’s enterprises. Amid claims by some employers that their premiums are nearly three times as high as they are in neighboring states, Tennessee plans to tackle workers’ compensation reform this year out of fear that it will start losing jobs to its neighbors.

Alaska employers are facing a 21 percent rate increase this year, followed by Vermont and Kentucky. In Texas, costs have climbed at double-digit rates for three years in a row. “As was the case with NCCI’s previous filing cycle, the majority of the filings made are for increases,” said Peter Burton, spokesman for the rating organization. “These increases are primarily being driven by double-digit medical cost increases and rising indemnity costs.”

The average indemnity cost per claim in 2002 reached $16,100, up from $11,800 five years earlier. Medical costs per claim jumped $16,300 in 2002, up from $11,100 in 1998. NCCI expects more increases this year.

Still, the number of claims per 100 workers (frequency) has continued dropping. In 2002 it fell another 3.7 percent, compared to a drop of more than 6 percent in 2001, according to the NCCI.

The danger for the industry, according to Farnam, is that if medical cost inflation continues at the rate it has been, prices may not keep up, leading to further losses. The other danger is that frequency—the only bit of good news on the cost side of the equation—will start edging upward.

“Given the reserve deficiency that remains in the workers’ comp segment, this does not bode well for the financial health of the industry in the mid term,” he said. “Unless cost drivers are addressed, 2004 may be as good as it’s going to get.”

Florida is bucking the trend in price increases but that has led to a less than vibrant workers’ compensation market for employers. After years of lobbying, the industry in the summer of 2003 finally got substantial published premium hikes on average of 13.7 percent. As employers wailed, however, the legislature got busy on reforms, which were signed into law by Gov. Jeb Bush. As a result, rates were ordered lowered, 14 percent, essentially wiping out the rate increase. Just when some carriers seemed interested in getting back into workers’ compensation, they lost interest after the rates were reduced.

A prime example is FCCI Insurance Co., a Lakewood Ranch, Fla.-based insurance carrier that’s been unloading its mainstay line Florida workers’ compensation. This year the company is writing 40 percent less workers’ compensation in Florida than two years ago. The company figures rates are 10 percent less than what they should be.

Other states that have low rates also have workers’ compensation markets marked by a lack of competition. States like Oregon and Arizona have their state compensation funds writing the majority of the business and at prices private insurers won’t compete with.

But some insurance industry trade associations are betting that the pressure will eventually be too great to increase rates in those states or the states will have to tackle workers’ compensation reform in earnest.

Topics California Florida Carriers Workers' Compensation Tennessee