early prognostication: positive or …...positive or negative workers comp market in 2014? by...

In May of 2013, NCCI offered an

“encouraging” outlook for the workers

compensation industry.

That outlook was based on a number of factors, including:•Acombinedratiothatimprovedforthefirsttimesince2006• Improvedpremiumgrowthforthesecondconsecutiveyear•Asignificantdeclineinclaimfrequencyforthefirsttimesince 2009 •Claimseverityincreasesthatremainedmodest

Whiletherewerepositivedevelopments,wealsonotedseveral concerns:•Despiteimprovement,thecombinedratioremainedtoohigh•Slowgrowthinemploymentwasimpedingstrongerpremium growth•Theindustry’sreservepositionwascontinuingtodeteriorate

Asweonceagainbegintheannualexerciseofevaluatingandreporting on the outlook for the workers compensation industry, wecontinuetobelievethatthelong-termoutlookoffersreasonsfor optimism—and areas of concern. On the hopeful side, our earlyanalysissuggestsamodestincreaseinpremiumvolumeand a continued decline in the combined ratio.

Balancedagainsttheseareseveralongoingissues.Mostim-portant, perhaps, is the status of the Terrorism Risk Insurance Act(TRIA)—willCongresschoosetorenewthisvitalbackstopbeforeitexpiresattheendof2014?

EARLY PROGNOSTICATION:

POSITIVE OR NEGATIVE

WORKERS COMP MARKET

IN 2014?By Stephen J. Klingel, CPCU, WCP

President and CEO, NCCI

WORKERS COMPENSATION2014 ISSUES REPORT04

Let’stakealookatthevariousforces buffeting the industry in 2014andwhetherNCCI’searlyoutlook weighs more on the positiveorthecautioussideofthe scale.

Latest Industry ResultsOurend-of-yearanalysisof2012 workers compensation industryresultsrevealedanimprovingmarketinseveralkey areas.

Forexample,atmid-yearNCCIhad estimated an industrywide combined ratio for 2012 of 109.Actualdatareportedbythe industry indicates a Calen-

darYear2012combinedratioof108.The1-pointchangewasduetoasmallimprovementintheunderlyinglossratioaswellasaslightdeclineinthedividendratio.ThecurrentestimateforCalendarYear2013is106—aprojectiontemperedbytheongoingstateofanimprovingbutfragileeconomy.

Inanotherresult,NCCI’spreliminaryestimateoftheoperatingratiowas+5%,drivenlargelybya14%investmentgainratio,whichishigherthanthehistoricalaverageof11.9%forCalen-darYears2001to2011.Final2012resultsrevealeda+5.6%operatinggainratioasaresultofthe1-pointimprovementinthecombinedratioandaslight0.3%downwardadjustmenttotheinvestmentgainratio.

NCCIalsoevaluateddatareportedforthefirsthalfofCalendarYear2013toprovidefull-yearestimatesforwrittenpremiumandthecombinedratio.Asnotedabove(andstillsubjecttorevision),ouranalysissuggestsamodestincreaseinpremiumvolumeandacontinueddeclineinthecombinedratio.

Projectednetwrittenpremiumsforworkerscompensationalsocontinue to show signs of growth—although at a more moder-atepacethaninCalendarYears2011and2012.NCCI’scurrentestimate for 2013 net written premium is $37.2 billion, which represents6.0%growthover2012.

In terms of workers compensation bureau rates/loss costs, thechangesweresignificantin2012butmodestfor2013.Thesignificantincreasesin2012markedthefirstmajorincreasessince 2003 and ended a long period of rate/loss cost reductions thatresultedinacumulative26%decline.(Forafullrecapof

state-basedissuesandconcerns,IinviteyoutoreadNCCISeniorDivisionExecutivePeterBurton’s“2014LegislativeandRegulatory Outlook” in this Issues Report.)

Thesepositiveresultsaresupportedbythenation’sslowlyaccelerating(albeitoftenrocky)economicrecovery.Atthesametime,lossdriverssuchasfrequency,severity,andwagesshowlittlecausetoexpectbiggeryear-endimprovementsinCalendarYear 2013 results.

Residual Market ResultsThe growth in residual market premium for Policy Year 2012 was thefirstmaterialincreasesince2002.Earlyindicationsfor2013premiumscontinuethepatternofpremiumvolumegrowthandincreased assignments for the residual market, albeit at a more moderatepace.Despitetherecentgrowth,thepremiumlevelremainslowrelativetohistoriclevels.

ThecombinedratiofortheresidualmarketpoolsservicedbyNCCIcontinuedtodeclineforPolicyYear2012.Theprojectedultimatecombinedratioof112forPolicyYear2012,valuedasofDecember31,2012,fellmodestlyto110aftertwoquartersof reporting in 2013. Policy Year 2011 saw a similar decrease, from117,valuedonDecember31,2012,to114,valuedasofJune2013.Thismarkstwoconsecutiveyearsofdeclinesfortheresidual market combined ratio.

The most recent underwriting results for residual market pools continuetoremaincomparabletoresultsoverthelastdecadeandarefarmoremanageablethanthedebilitatinglevelsoftheearly 1990s. The most recent update to the underwriting results, valuedasofJune2013,showedimprovement,partiallyduetobetter-than-expectedlossemergenceinpriorpolicyyearsduringthefirsttwoquartersof2013.

Theimprovementsoutlinedabovecontinuetodisplaytheindustry’sslowbutsteadyprogressatrecoveringfromseveraldiscouraging years, which were caused mostly by the economic downturn. We remain largely encouraged at the state of the marketinearly2014.Butareasofuncertaintycontinuetoexist.Willclaimsfrequencymaintainitsrecentreturntoadownwardtrend?Willtheslowinggrowthrateofmedicalcostscontinue?Willtheeconomyandemploymentnumbersfinallystabilize?

Also,oneoutlyingissuehastheabilitytocausetremendousdisruption in the industry.

Game Changer? TRIA Renewal Due in 2014AstheDecember31,2014expirationdateforthefederalTerror-ismRiskInsuranceAct(TRIA)nears,industrystakeholdersare

WORKERS COMPENSATION2014 ISSUES REPORT 05

expressingincreasingurgencyabouttheneedforabillrenewal.Becauseworkerscompensationinsurersareunabletoexcludeorlimitterrorismcoverageonrisks,acarrier’sexposuretoanattack against a high concentration of employees at any one worksite can easily mount.

Amongthemostimmediateconcernsarerisingprices,shrinkingcapacity, and the potential for increased burdens to the residual markets.

Ifinsurersreducetheirexposureanddonotofferasmuchcapacity,stateresidualmarketsandpoolsmighthavetoabsorbtherisk.Becauseworkerscompensationinsurerseffectivelyreinsureresidualmarketrisks,amajorterrorismeventcouldputthe market under duress.

This concern has led to a number of Congressional hearings andactivelobbyinginsupportofanextensionfrommanyprom-inentindustrytradegroups.WhilewesupporttheextensionofTRIAandcontinuetoprovideinformationandadvicetoourindustry partners about the need for renewal, we are also pre-paring the technical materials that will be necessary if renewal is notrealized.

ForfullinformationonTRIArenewalandNCCI’sactivitiesinsupportoftheindustry,IdirectyoutoNCCIWashingtonAffairsExecutiveTimTucker’sarticle,“FutureofTerrorismInsuranceBackstop,” in this edition of Issues Report.And,asalways,wewill continue to update ncci.comwiththelatestTRIAnewsandinformationasitbecomesavailable.

Other Industry ConcernsApartfromTRIArenewalandourcontinuinghopesforanimprovedeconomy,manyoftheremaininghigh-profileindustryconcernsrevolvearoundfederalissues.

ChiefamongtheseisthefullimplementationoftheAffordableCareAct(ACA)andwhatthatbroadnewlawmaymeanfortheworkerscompensationindustryoverthelongterm.Whilemostexpertsdonotexpecttremendouschangesforourindustrybased on the new law, there are a number of possible consequences.

Weaskedtwoexperts—KathyAntonello,NCCIchiefactuary,andSamFriedman,insuranceresearchleaderwiththeDeloitteCenterforFinancialServices—tosharetheirthoughtsonthelong-termconsequencesoftheACA.Theirarticlesappearinthis Issues Reportunder“TheAffordableCareActandWorkersCompensation:OurExpertsWeighIn.”

WewillalsocontinuetowatchastheFederalInsuranceOffice(FIO)beginstotrytoimplementsomeofthefindingsandrecommendationscontainedintheirlate-yearreportoninsur-anceregulatorymodernization.Thereportlargelyfocusedonstructuralchallengestothestate-basedinsuranceregulatoryframework, and we will be interested to see not only how a new frameworkmightbecreatedbutwhattheintended(andunintended)consequencesmightbe.

Continued Optimism?While the internal economics of the industry continue to show welcomeandsteadyimprovement,weareonceagaincautiousaboutexpressingapositiveindustryoutlookforthemonthsahead.Whilemostindicatorsshowcontinuedimprovement,it’simportant to note that the combined ratio remains too high, and achievinganadequatereturnremainsachallenge.

Thesefactors,alongwiththeoverhangingshadowofthepoten-tial loss of the terrorism backstop, add a note of caution to what mightotherwisebearelativelyoptimisticoutlook.

Movingintothemiddleof2014,NCCIwillcontinuetocollectandanalyzemarketresultspriortodeliveringourannualStateof the Line report at the Annual Issues Symposium in May. We remain hopeful that some of the answers about the direction of TRIA,theACA,andtheoveralleconomywillbecomeclearer,ifnotcompletelyresolved.Inthemeantime,weinviteyouto continuetovisitncci.com for industry news, including our continuallyupdatedresearchandlegislativeanalysis.

Stephen J. Klingel, CPCU, WCP, was appointed president and chief

executive officer of NCCI in 2002. Before joining NCCI, Mr. Klingel

was a leader with the St. Paul Companies for more than 25 years.

WHILETHEINTERNALECONOMICS

OFTHEINDUSTRYCONTINUETO

SHOWWELCOMEANDSTEADYIM-

PROVEMENT,WEAREONCEAGAIN

CAUTIOUSABOUTEXPRESSING

APOSITIVEINDUSTRYOUTLOOK

FORTHEMONTHSAHEAD.

WORKERS COMPENSATION2014 ISSUES REPORT06

WORKERS COMPENSATION2014 ISSUES REPORT 07

Aslawmakerscontinuetomeetforthesecondsessionofthe113thCongress,movementispossibleonseverallegislativeandregulatoryinitiativesthatcouldimpactworkerscompensa-tion insurance carriers.

FromregulatoryframeworkreformsasidentifiedintheFederalInsuranceOffice(FIO)reportonstateinsurancemodernizationtoissue-specificprogramsandprocessessuchastheDefenseBaseActandMedicareSet-Asides,thisCongresscouldpro-ducesignificantchanges.

Belowareseveralkeyissuesofinterest.

Federal Insurance Office—Regulatory ReformLatelastyear,theFederalInsuranceOfficereleaseditsmuch-anticipatedreportonstateinsuranceregulatorymodern-ization.Thereport,“HowtoModernizeandImprovetheSystemofInsuranceRegulationintheUnitedStates,”wasmandatedunderTitleVoftheDodd-FrankWallStreetReformandCon-sumerProtectionActof2010.

ThefindingsandrecommendationsoftheFIOreportonin-suranceregulatorymodernizationlargelyfocusonstructuralchallengestothestate-basedinsuranceregulatoryframework.Forexample,keychallengeshighlightedrelatetolackofstateregulatory uniformity and the regulatory impact of the increasing globalizationofinsurance.

While the report falls far short of calling for absolute federal regulation of the insurance sector, it does outline an approach towardasignificantlyenhancedfederalregulatoryroleinseveralareasofinsuranceregulation.TheFIOenvisionsthisnewrolebeing undertaken through either the creation of federal stan-dardsimplementedbythestates(e.g.,theNationalAssociationofRegisteredAgentsandBrokers[NARABII])orthroughdirectfederalregulation(e.g.,mortgageinsurance).

Reaction from state regulators and insurance industry repre-sentativeshasbeenmeasured.Mostacknowledgethatthereareopportunitiestoimprovethecurrentstate-basedregula-torysystemandpointtoinitiativesunderwayattheNationalAssociationofInsuranceCommissionersandindividualstatesaseffectivesolutions.Somestakeholdershavesuggestedthatfederalinvolvementininternationalissuesisappropriateprovid-edthatinvolvementdefendsthecurrentstate-basedsystem.

To be implemented, many of the recommendations in the FIO reportwouldrequireadditionalCongressionallymandatedau-thority to the FIO or other federal agencies, and that could also includepossibleamendmentstotheMcCarran-FergusonActof1945,whichcodifiedthestates’primacyasregulatorsoftheinsurance sector.

Medicare Secondary Payer IssuesThere continues to be strong support in Congress to enact reformstotheMedicareSet-Asideprocess.Whilestand-alonelegislationhasnotreceivedconsideration,apossiblevehiclefortheMedicareSet-Asideprovisionscouldbelegislationintro-ducedin2014toachieveapermanentsolutiontotheMedicareSustainableGrowthRate(SGR)formula(commonlyreferredtoasthe“docfix”).Latelastyear,Congressincludedathree-monthextensiontothedocfixaspartofthefederalbudgetagreement, and it needs to act on legislation containing the long-termsolutioninthefirstquarterof2014.

TheStrengtheningMedicareandRepayingTaxpayers(SMART)Actwassignedintolawin2013toaddressconditionalpay-mentsmadebyMedicare.TheintentoftheSMARTActwastostreamline the process in which parties to settlements related to workerscompensation,auto,andliabilityclaimswouldreceivefromtheCentersforMedicare&MedicaidServices(CMS)time-ly conditional payment information needed to settle their claims.

Latelastyear,CMSfiledanInterimFinalRule(IFR),whichim-plementedprovisionsoftheSMARTAct.CommentshavebeenfiledwithCMSbyabroadcoalitionofstakeholdersincludinginsurers, claimants, and employers, indicating that the IFR is inconsistentwiththestatuteandshouldbewithdrawn.CMShas yet to respond to those comments.

Furthering Asbestos Claim Transparency (FACT) Act of 2013In2013,theUSHouseofRepresentativespassedlegislationthatwouldrequireasbestospersonalinjurysettlementtruststoreport,onaquarterlybasis,asbestosclaims-relatedinfor-mation.HR982,TheFurtheringAsbestosClaimTransparency(FACT)ActsponsoredbyRepresentativeFarenthold(R-TX),wouldalsorequireasbestostruststoprovideinformationuponrequesttopartiesinvolvedinasbestoslitigationclaims.Sup-porters indicate that the legislation would address fraud and abuse in the current system.

TheSenateisunlikelytoconsiderthelegislation.AndPresidentObama has signaled that if the bill comes before him, he would vetoit,citingclaimantprivacyconcerns. Defense Base ActLegislationhasbeenintroducedintheHouseofRepresentativesthatwouldmakesignificantchangestoDefenseBaseActcover-ageandissimilartotheadministration’sfiscalyear2014budgetproposal,whichwouldcreateagovernment-backedDefenseBaseAct(DBA)self-insuranceprogram.Thelegislationwouldre-quirefederalcontractorsworkingonmilitarybasesandUSgov-ernmentinstallationsabroadtoseekcompensationandbenefitsundertheprogram.SupporterstriedunsuccessfullytoattachtheDBAreformtoseveralpiecesoflegislationduring2013.

FEDERALINITIATIVESANDWORKERSCOMPENSATION