Rousmaniere: How Big is the Work Comp Market?

Peter Rousmaniere

A lot has been said about the maturing of workers’ compensation. The frequency of injuries will continue to decline by a faster rate than the increase in the workforce, resulting in an absolute decline in the number of injuries. But it is easy to overlook how large the field actually is today. Here are some estimates about the claims business, and how it is structured among key types of claims payers and employers. The entire market is large, and concentrated among claims payers and among participating employers.

Using a number of independent sources of information, one can stick on a wall a dozen data dots about the claims business. By connecting the dots, one can construct an estimate of the size, and segments, of the market.

The total value of new claims arising each year is about $65 billion in benefits (indemnity and medical benefits, including services “allocated” to the claim). The vast majority of these losses arise from about 950,000 new lost time compensable claims each year. Given that workers’ comp has a long tail, that is, claims can remain open for decades, and the total amount of reserves for open claims is likely around $175 billion. This means that where a new insurer formed to manage old “legacy” claims, it took more than $1 billion in open claims from existing claims payers, and it would control less than one half of one percent of the dollar value of open claims.

Very many insurers, third party administrators, and self-insured, self-administered employers manage these claims. Let’s remove from consideration entities that manage well less than $10 million dollars of new claims per year. We then probably have roughly 600 entities that control perhaps 95% of the entire claims business in claim volume. Who are these claims payers?

Information from among several sources suggest that insurers handle 60% of all claims; TPAs, 30%; and self-administered entities, 10%.

The sources also suggest that the business is concentrated. Some 60% of all claims are managed by about 30 to 35 claims payers. These include the top 25 insurers, the top six TPAs, and the one self-administered employer with jumbo annual losses — the federal government.

These top insurers are partially listed by the National Association of Insurance Commissioners. (No list from any source should be taken at face value.) The top 25 control 70% of the insurer market. Travelers is the largest. Below the top tier of 25 insurers are some 200 or more insurers with annual premiums between $10 million and $500 million.

But market leadership varies greatly by state. Seven of the top 25 insurers, all with at least $500 million in premiums, are state funds. Look at the state level, and count only insurers that have at least 10% market share in a state and that share is at least $100 million in premium. This happens 38 times. I call these insurers “powerhouses” in their respective market. State founds account for 21, or over half, of powerhouses, and Travelers shows up six times. In general, national private insurers have low shares and most state funds have high shares in individual state markets.

The top six TPAs, led in size by Sedgwick, and including Corvel, Broadspire, ESIS, Gallagher Bassett and York, may account for more than 70% of the TPA market for self-insured employers, when measured by claims dollars. Below the top tier of six TPAs, there may be 200 TPAs managing losses of $5-$10 million or more, but this estimate is very soft.

(Estimating the volume business that TPAs do for insurers is difficult. Some of the claims business accounted for by insurers is actually assigned to TPAs.)

The self-insured, self-administered market includes some private companies and very many public entities. Below the federal government, there’s a top cluster of self-administered employers, with average losses of about $100 million, only about 25 in number. Many of them are very large public entities. And below the top 26 self-insured, self-administered employers, there may be an additional 250 such employers with annual losses at more than $5 to $10 million. This estimate may be low because there are very many governmental entities that self-administer.

Has the market changed in any material way? In the past 20 years, employers have not significantly increased their use of self-insurance, but they have actively increased their retention of losses, so that from an economic standpoint many insured employers have much the same financial exposure as self-insured employers. And, looking at the ranks of the largest insurers, they have changed somewhat. It’s unclear if these developments have had a big impact on the structure of the market.

What about the employers themselves? The claims business is skewed to a relatively small number of employers with large workers’ comp exposure. Some data suggest that less than 5% of employers account for more than three quarters of all of the $65 billion in claims costs. Large exposure insured employers, roughly 150,000 in number and with over $100,000 in premium, account for about half of all insurance premium dollars. And about 150,000 self-insured employers. Including very many public self- administered employers, overwhelmingly dominate the self-insured community.

Again, the entire market is large, and concentrated among claims payers and among participating employers.