Workers’ compensation insurers are enjoying profitable and stable years. People who run and advise them tell me that computer analytics, relatively new to underwriting, has been a gift that will keep on giving. And it’s good for employers.
National Council on Compensation Insurance (NCCI) chief actuary Kathy Antonello, at the organization’s annual conference in May, painted a picture of a near cloudless summer day. Frequency of injuries continues to decline. The average cost of claims rises, but not by much. The relative health of hiring and wage increases pushed up payroll to be covered by 4% in 2016. The combined loss ratio of insurers in 2016 was 94%. Reserve deficiencies, a canary in the mine for trouble, were historically modest.
Two forces tighten profits. One is the decline of interest rates, which has lowered the investment yield of workers’ comp insurers from around 6% for a decade ago, to about 3% today. The other is a decline in premiums as experienced by employers. Lockton, the broker, and The Council of Insurance Agents & Brokers, each estimate that premiums have been declining in the order of about 2% or more. In past pricing cycles, the rate of decline might have been double that, as insurers chased after accounts.
Chalk this pricing discipline to what a CEO in a very successful workers’ comp insurer told me: “no more guessing.”
A half dozen underwriters attending the NCCI conference were convinced that analytics has greatly reduced the risk of underwriting errors. As several told me, as if reading off the same script, data on their losses are both more nuanced and much easier to assemble and interpret. Insurers also appear to be organizing their many accounts into more informative categories.
I absorbed their comments, while in the back of my mind rang an admonition by an actuary, which is: An insurer that views the world as a normal bell curve of risks is one that will, at some time, go bankrupt. To prevail, the workers’ comp insurer must understand the nuances of each account. That way, it can safely predict losses and how it might influence them. Injury risk, like politics, is local.
Greg Jamison, senior vice president for underwriting at Maine Employers Mutual Insurance Company, remembers that back in the 1980s, underwriters used to go to the yellow pages to learn about the prospective account. Today, an underwriter can through the Internet to discern the submarkets an employer works in.
One sign of analytical adeptness is how insurers compete. Lockton reported that while premiums dropped about 2 percent in the last quarter of 2016, clients that changed carrier at renewal, saw a 7% drop. Was carrier switching due to hungry insurers eager to gain market share regardless of profitability?
Mark Moitoso, analytics practice leader at Lockton, told me that carriers have “the tool set to make sure they make money. The market feels different than 20 years ago, with cash flow underwriting then, and even six years ago.” He is seeing a lot more data scientists working in insurance. They are helping, he notes, to make more refined scheduled credit and debit decisions.
Another answer to the question was given to me by Valen Analytics, which provides underwriting tools to insurers. Bret Stroyer, an actuary and vice president of services at Valen, told me that an insurer that specializes in a certain segment, such as transportation, “can charge a premium 10% or more below the competition, and have the same underwriting result as the main street writer.” It takes “effective use of deductibles, loss control programs and incentives, good claims management, and proper reinsurance protection.”
In sum, insurers have greatly improved their underwriting acumen. This tempers the irrational exuberance that destroys insurers and blows up insurance markets. A little history is in order…
In the mid 1990s, top management at Kemper, a mutual insurer, worked up a plan to shed its non-insurance business, grow into a multi-line powerhouse and make a pile of money by demutualizing and selling stock on Wall Street. Some complicated reorganizations ensued, and the insurer launched more than 20 new operating units, many in long-tailed lines of insurance.
An executive who worked there at the time said the company “shot out the lights” in order to gain market share which clearly led to significantly inadequate pricing. Kemper wrote $3.7 billion in premiums in 1997. With price discounting and changes in products, its writings declined to $2.5 billion. It struggled to get underwriting results and operating cash flow to break even. Then, in 2001-2002, it was hit with almost $1.5 billion in loss-reserve adjustments. Regulators took over the company in 2003.
California’s State Compensation Insurance Fund (SCIF) shared with Kemper a relentless lust for growth. In the late 1990s SCIF began to sell aggressively. As the Fund grew, its pricing model undercut private carriers, driving them to retreat. Prices were too low to allow the Fund's surplus (equity) to keep up. It grew to a size four times or greater than a private carrier would be been permitted given its surplus. By 2002 the Fund had reached a point where just one bad year, or a few mediocre years, would have wiped out its surplus.
A.M. Best over time lowered its rating for SCIF from A- to B-. SCIF responded by dropping Best as a rater. Standard and Poor's downgraded the fund from A to BB+. SCIF then cut off S&P. In a dispute over adequacy of reserves, the outside auditor quit. SCIF sued the state commissioner of insurance to ward off disclosures. At the time, the CEO wrote that the "State Fund has become a model for the industry and other states." Throughout these years, the Fund never employed a chief financial officer.
Eventually top management was replaced, and since the mid 2000s the Fund has been in good hands, its operations and balance sheet reformed.
Today, insurers can be happy, and employers can be protected from irrational behavior.
ABOUT THE AUTHOR
Peter Rousmaniere is widely known throughout the workers’ compensation industry, both for his writing and consulting experience. Based in the picture perfect New England town of Woodstock, VT, he is a regular on the conference circuit, and is deeply in tune with trends and developments within the industry. His passion is writing and presenting on issues largely related to immigration, and he maintains a blog on the subject at www.workingimmigrants.com.
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