Mega-Trends Influencing the Workers Compensation
Insurance Industry
62nd Annual Workers CompensationEducational Conference
Orlando, FL
August 13, 2007
Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
IT’S EASY TO FEEL GOOD ABOUT
WORKERS COMP TODAY
Once Disastrous Line, Now Makes Healthy Profit
Workers Comp Calendar Year – Private Carriers
101
97
111
110
107
103
97
100
101
107
115 11
8 122
80
8590
95
100105
110
115120
125
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Percent
p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders
Workers Comp Combined Ratios, 1994-2006P
WC insurers lopped 25 points off the
combined ratio in just 5 years
115.8
107.4
100.198.3
100.7
92.4
97.095.0
91.7
90
100
110
120
01 02 03 04 05 06 07:Q1 07F 08F
P/C Insurance Combined Ratio, 2001-2008F
Sources: A.M. Best; ISO, III. *III estimates for 2007/8.
2005 figure benefited from heavy use of reinsurance which lowered net losses
2006 produced the best underwriting result
since the 91.2 combined ratio in 1949
As recently as 2001, insurers were paying out nearly $1.16 for
every dollar they earned in premiums
2007/8 deterioration due primarily to falling rates, but results still strong assuming
normal CAT activity
Pre-Tax Operating Gain Ratio (%)
1.3 -0.1 0.9
8.4
13.5
-4.2
-8.6 -7.8
-3.2
7.5
12.7
19.717.9
19.8
13.9
5.2 4.4
-15
-10
-5
0
5
10
15
20
25
90* 91* 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
WC profitability is on the rise, but is
it sustainable?
Calendar Year
Percent
Workers Comp Profitability Is Improving
Source: NCCI
P/C Net Income After Taxes1991-2007F ($ Millions)*$1
4,17
8
$5,8
40
$19,
316
$10,
870
$20,
598
$24,
404 $3
6,81
9
$30,
773
$21,
865
$3,0
46
$30,
029
$63,
252
-$6,970
$63,
695
$44,
155
$20,
559
$38,
501
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
07F
*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual Q1 net income of $15.813B **Actual first quarter 2007 result. Sources: A.M. Best, ISO, Insurance Information Inst.
2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROAS1 = 14.0%2007F ROAS = 12.9%**
Insurer profits peaked in 2006/7. “Normal” CAT year,
average investment gain imply flattening
WHY YOU SHOULD FEEL GOOD ABOUT
WHAT YOU DO Saving Lives, Increasing
Productivity and Much More
It’s Not Just About the Money
Did You Know That When You Prevent a Workplace Injury You…
• Keeping Workers Comp Costs Down is Just the Beginning• You Help Companies Remain Productive1
Permanently Disabling Injuries 565 Lost Future Work Days on Avg. Fatal Injuries 5,850 Lost Future Work Days on Average
• You Increase/Preserve Worker Incomes Seriously Injured Workers Have Lower Lifetime Earnings, on Average Reduced Likelihood of Filing Bankruptcy Less Likely to Need Public Assistance
• You Maintain/Improve the Quality of Worker’s Home Life Higher Incidence of Divorce, Substance Abuse, Depression Among Seriously
Injured
ALL REASONS TO BE PROUD OF WHAT YOU DO!!
1 US Census Bureau: http://www.census.gov/compendia/statab/tables/07s0639.xls
Lost-Time Claims
-4.2 -4.4
-6.9
-4.5 -4.1 -3.9
-6.8
-9.2
0.3
-6.5
-4.5
0.5
-3.9
-2.3
-4.5
-6.6
-10
-8
-6
-4
-2
0
2
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Cumulative Change of –52.1%since 1991 means that lost work
time claims have been cut by more than half
Accident Year
Percent Change
Workers Comp Lost-Time Claim Frequency Down More than 50% Since 1991
2006p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
Number of Fatal Work Injuries is Continues to Fall, 1992 – 2006p
6,05
56,23
8
6,20
2
6,27
5
6,63
2
6,33
1
6,21
7
6,05
4
5,92
0
5,91
5
5,53
4
5,57
5 5,76
4
5,73
4
5,70
3
4,800
5,000
5,200
5,400
5,600
5,800
6,000
6,200
6,400
6,600
6,800
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06pSource: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Workers comp insurers & the entire workplace safety
community have contributed to the 14% decline in workplace
fatalities since 1994
Rate of Fatal Work InjuriesContinues to Drop, 1992 – 2006p
4.5
4.84.84.9
5.35.25.2
4.54.3 4.3
4.0 4.04.1
4.03.9
3
4
4
5
5
6
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06pSource: US Bureau of Labor Statistics ; Insurance Information Institute.
Fatality rates are down 26.4% since 1994—
nearly double the 14% decline in the number of
on the job fatalities
Fatal Work Injuries per 100,000 Workers
Lives Saved Due to Reduction inFatal Work Injury Rate, 1995–2006p
1,8951,717
1,6231,7581,757
357
585 610
833
1,0771,210
1,382
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
95 96 97 98 99 00 01 02 03 04 05 06pSource: Insurance Information Institute from BLS data.
Workers comp insurers are a major force in saving worker lives
Reduction in Occupational Deaths Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 3.9 in 2006
Nearly 2,000 work lives are saved annually due to
improved workplace safety!
Cumulative Lives Saved Due toReduction in Fatal Work Injury Rate
357 9421,552
2,3853,463
4,6736,055
7,811
9,569
11,192
12,909
14,803
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
95 96 97 98 99 00 01 02 03 04 05 06pSource: Insurance Information Institute from BLS data.
Saving a Life, Saves a Family
Cumulative Lives Saved Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 3.9 in 2006
Since 1995, nearly 15,000 worker lives have been saved due to improved
workplace safety!
565 590547 582 579
520585 571 553
505 531 559 567516
618665 651
691734
810719 696
822770
809
1,0741,0801,036
927860
643559 567
516
1,242
1,3431,3461,3461,393
1,4421,365
1,4091,3731,3531,398
1,437
1,329
557
721706
716600 632
609677651
714
1,044
1,496
1,158
400
600
800
1000
1200
1400
1600
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Struck by Object Falls Homicides Highway Incidents
Four Most Frequent Work-Related Fatal Events, 1992-
2006
There has been a 52% decrease in work-related homicides since
1994.Vehiculat deaths are #1 killer.
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
BUT ALAS, THERE ARE MANY CONCERNS
Operational, Demographic &
Regulatory
THE SHRINKING PREMIUM BASE Competition, Leakage Conspire to Shrink WC
31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3
25.0 26.129.2 31.1
34.738.637.8
31.0 31.329.8 30.5
29.126.3
28.226.9 25.8 24.9
28.4
31.9
37.3
41.8
45.9 4647.2
0
10
20
30
40
50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
State Funds ($ B)Private Carriers ($ B)
Total Workers Compensation Premium Declined in 2006
Net Written Premium
Calendar Year
$ Billions
p Preliminary
Source: 1990–2005 Private Carriers, A.M. Best Aggregates & Averages; 2006p, NCCI 1996–2006p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent
Average Commercial Rate Change by Line: 4Q99 – 1Q07
Source: Council of Insurance Agents & Brokers
Workers Comp rates (red line) along with most major
commercial coverages is renewing down about 10%
during 2007
Alternative Risk Transfer MarketSaps Traditional WC Carriers
Automobile, 12%
Property, 10%Workers Comp,
43%
Liability (excl. Auto), 35%
Source: MarketStance.
Workers Comp account for the
largest share of the alternative market,
particularly captives
$ Billions
Workers Compensation: Large Deductible Market Share
1%
33%
43%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1990 2000 2003Sources: National Council on Compensation Insurance; Insurance Information Institute.
Employers have become very
accustomed to accepting a greater share of risk and claim frequency has decreased
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
F2
00
8F
20
09
F2
01
0F
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by NWP Growth*
1975-78 1984-87 2001-04
*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.
2006-2010 (post-Katrina) period could resemble 1993-97
(post-Andrew)
2005: biggest real drop in premium since early 1980s
Growth in Net Written Premium, 2000-2008F
*2007 figure based 2007:Q1 result of 0.8%.Source: A.M. Best; Forecasts from the Insurance Information Institute.
5.1%
8.1%
14.1%
9.8%
4.7%
0.3%
4.3%
0.8% 1.0%
2000 2001 2002 2003 2004 2005 2006 2007F* 2008F
P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are
expected to remain healthy
MEDICAL CLAIM COST INFLATION
The Problem That Will Never Go Away
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%4.0% 4.4% 4.2% 4.0%
5.1%
7.4%
10.1%
8.3%
10.6%
8.2%
14.0%
7.4%
9.0%
6.8%
11.7%
7.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
3.5
pts
WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%)
from 1995 through 2006
$8.3 $8.4 $8.2 $8.9 $9.4 $10.1$11.1
$12.0$13.3
$14.4
$16.4$17.6
$19.2$20.5
$22.9$24.6
$5
$10
$15
$20
$25
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Annual Change 1991–1996: +4.1%Annual Change 1997–2005: +9.5%
Accident Year
MedicalClaim Cost ($000s)
2006p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Workers Comp Medical Claims Continue to Climb
Cumulative Change = +200%(1993-2006p)
Med Costs Share of Total Costs is Increasing Steadily
Indemnity55%
Medical45%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity52%
Medical48%
Indemnity41%
Medical59%1986
1996
2006p
WC Med Cost Will Equal 70% of Total by 2016 if Trends Hold
Source: Insurance Information Institute.
Indemnity30%
Medical70%
2016 EstimateWC med costs could equal 70%of system costs by 2016. This means that claims
severity will accelerate relative today and claims management will
become progressively more difficult and
complex
INDEMNITY CLAIM COST INFLATION
The Problem That Can Sometimes Be Tamed
IndemnityClaim Cost (000s)
Lost-Time Claims
$9.9 $9.6 $9.4 $9.8 $10.0$10.6
$11.4$12.4
$13.6
$15.1$16.5$16.9
$17.7$18.0$18.6
$19.6
$5
$7
$9
$11
$13
$15
$17
$19
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
Annual Change 1991–1996: +1.2%Annual Change 1997–2005: +6.6%
2005p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI
Accident Year
Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2006p
Cumulative Change = +108.5%(1993-2006p)
3.0%
4.3%5.0%
4.4%5.2%
4.4%
2.4%2.0%
2.4%2.8%
3.4%
5.9%
7.7%
9.0%
10.1%
4.8%
1.9%
3.0%
5.5%
3.0% 2.4%
9.7%10.9%
1.7%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
2.1
pts
2006p: Preliminary based on data valued as of 12/31/2006; 1991-2005: Based on data through 12/31/2005, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
WC indemnity severity is once again outpacing
wage inflation
THE AGEING WORKFORCE Working Longer,But Not Stronger
Fatal Work Injury RatesClimb Sharply With Age
4.94.03.63.2
2.72.7
0.8
10.8
0
2
4
6
8
10
12
16-17 18-19 20-24 25-34 35-44 45-54 55-64 65+
Source: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.
Fatality rates for workers 65 and older are triple that of workers age 35-44. The workplace of the future will have to be completely redesigned to accommodate
the surge in older workers.
Fatal Work Injuries per 100,000 Workers (2006)
THE OBESITY EPIDEMIC
Major Cost Driver that WC Has Yet to Address
WC Claims and Lost Workdays by Body Mass Index (BMI)
40.9760.17
75.21
14.19
183.63
117.61
5.53 5.807.05
10.80
8.81
11.65
0
20
40
60
80
100
120
140
160
180
200
BMI <18.5(Underweight)
18.5-24.9(HealthyWeight)
25-29.9(Overweight)
30-34.9 (ObeseClass I)
35-39.9 (ObeseClass II)
40+ (ObeseClass III)
Los
t W
ork
day
s p
er 1
00 F
TE
s
0
2
4
6
8
10
12
14
Cla
ims
per
100
FT
Es
Lost Workdays Claims
Obesity is costing workers comp insurers and employers billions
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” J. of the American Medical Association, April 23, 2007.
The most obese workers file twice as many WC claims and 13 times more lost workdays than healthy weight workers
Medical & Indemnity WC Claims Costs by BMI
$7,1
09
$13,3
38
$19,6
61
$3,9
24
$5,3
96
$13,5
69
$34,2
93
$7,5
03
$51,0
91
$23,3
73
$23,6
33
$59,1
78
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
BMI <18.5(Underweight)
18.5-24.9(HealthyWeight)
25-29.9(Overweight)
30-34.9 (ObeseClass I)
35-39.9 (ObeseClass II)
40+ (ObeseClass II)
Medical Claims Costs Indemnity Claims Costs
Med claims costs are 6.8 times higher for the most obese
workers and indemnity costs are 11 times higher
Source: Ostbye, T., et al, “Obesity and Workers Compensation,” J. of the American Medical Association, April 23, 2007.
REGULATORY NIGHTMARES
WC’s Low Profile Won’t Last Forever
Regulatory Concerns• Political Populism is On the Rise• Eventually WC Trends Will Turn Adverse• New Congress and Populist Governors, Attorneys General and
Insurance Commissioners Will Take Great Interest in WC Which Impacts All Employers and Their Workers
• FLORIDA SCENARIO Governor would react to rising workers comp rates the same way he reacted
to rising property rates Rates would be actively suppressed Proposal to create “competitive” state fund that would also subsume residual
market Would be unlikely to charge actuarially sound rates or set proper reserves Residual market would explode with deficits financed by voluntary mkt. State fund would grow rapidly and market would become progressively more
socialized, possibly substantially so while real problems go unaddressed/ SOUND FAMILIAR???
Regulatory Concerns (cont’d)• McCarran-Ferguson
Narrowing could be harmful to WC rating bureaus and smaller insurers who rely most heavily on advisory loss cost information
• Health Care Reform Déjà Vu—1992 Health Care reform will be a major theme in 2008 elections as in 1992 Back in 1992, it was proposed that workers comp would be rolled into the
general health care system This could happen again Insurers back then fretted about the “Medical Indemnity Disconnect”
• Terrorism Extension virtually assured, but will likely be December House has proposed 15-year extension; Senate and Administration will want
something much shorter NBCR requirement on property side will have negative impact on insurers to
assume workers comp exposure (Senate may excise this)
Insured Loss Estimates: Large NBCR Terrorist Attack ($ Bill)
Type of Coverage New York WashingtonSan
FranciscoDes
Moines
Group Life $82.0 $22.5 $21.5 $3.4
General Liability 14.4 2.9 3.2 0.4
Workers Comp 483.7 126.7 87.5 31.4
Residential Prop. 38.7 12.7 22.6 2.6
Commercial Prop. 158.3 31.5 35.5 4.1
Auto 1.0 0.6 0.8 0.4
TOTAL $778.1 $196.8 $171.2 $42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.
Summary• Workers Compensation Markets Will Continue to Perform Well but
Operating Results and Profitability Will Begin to Erode• Competition in WC Markets More Intense Than Anytime in Last 15 Years
• WC Market Participants Have Provided One of the Most Valuable Services in the Industry—Saving Lives & Families
• Should be Proud of Achievements at Time When Insurers are Being Attacked by Politicians in Some States and in Washington
• BUT…Threats Abound
• Pressure is Building in a Number of Area Pricing, Leakage to Alternative Markets Medical Costs, Long-Run Regulatory Environment a Problem
• Disciplined Underwriting, Cost Management Key to Long-Run Success
Insurance Information Institute On-Line
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