The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2017 / 2018

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On a roll

Ted Bunker

Workers' compensation has come a long way from a dark period near the end of the 20th century, with 2016 the second straight year that a 94 percent combined ratio was recorded for carriers in aggregate, according to the National Council on Compensation Insurance (NCCI).

"The last couple of years it's been pretty good," says Pete Burton, the NCCI's senior division executive for state relations. It has been at least three decades since the industry achieved back-to-back 6 percentage point annual underwriting gains.

It was a good year by several other measures as well. NCCI data shows the industry's reserve deficiency shrank by almost 29 percent to $5bn - the lowest in nearly a decade - as claims declined and outcomes improved.

Compared with other segments of the property and casualty sector, workers' comp provided solid profitability. NCCI, which provides rate-setting data for workers' comp coverage in most states, highlighted that the P&C industry's aggregate combined ratio deteriorated by 3 percentage points to 101 percent in 2016.

Meanwhile, even clients got to share the benefits as the average premium rate fell for the fourth consecutive year with a 2.5 percent decline.

Yet the industry net written premium collected by private carriers climbed to a second straight annual record at an estimated $40.1bn last year. Combined with state funds that provide workers' comp, last year's total matched the $45.5bn collected by all carriers in the previous year.

Several factors are driving the healthy numbers, including safer workplaces benefiting from technological advances such as robotics and sensing devices, the collection of more and better data to improve risk analysis, refinements in claims management, and steady if sluggish economic growth creating more jobs and thus more premium.

By the end of 2016, non-farm payrolls in the US totalled a record $8.34tn. Full-time employment surpassed the old record at 124.26 million in August last year, then rose to about 125.5 million by the end of March, according to the Insurance Information Institute (III).

Dampening effects
While the good times have been rolling, insurers have nonetheless felt dampening effects from fast-rising medical costs and a rebound in some of the higher-risk industries such as construction and commercial transportation, spurred by the expanding economy.

In addition, an unrelenting epidemic of opioid drug abuse has grabbed the attention of insurers as workplace issues tied to addiction increase.

Click to enlarge Challenges on the horizon include changing workplace demographics, as members of the Baby Boom generation reach retirement age (but often remain in the workforce); the increasing number of part-time and contractor-based jobs, which typically are not covered by employer-based workers' comp; and efforts to make employer participation voluntary.

While Texas is the biggest state to let employers opt out of the workers' comp system, other states, such as Arkansas, South Carolina and Tennessee, have taken steps down that road, Burton says. But only Oklahoma has actually made it part of its law, and successful court challenges have found parts of the law unconstitutional.

The century-old US workers' compensation system is based on a "grand bargain" in which workers accept the benefits of insurance paid for by their employers in exchange for giving up the right to sue over on-the-job injuries or work-related illnesses. Opting out exposes businesses to the threat of litigation, which may explain why relatively few take that risk.

Efforts in other states have not gone as far. According to Robert Hartwig, a professor at the University of South Carolina's Darla Moore School of Business, this is partly because of reports in 2015 by the investigative journalism organisation ProPublica, which looked at the issue and focused on how regulatory changes had stripped benefits from injured workers.

A former III president who has also worked for Swiss Re and the NCCI, Hartwig says the political fallout from the ProPublica reports rapidly cooled deregulation efforts in many states, while at the same time financial pressure on the system abated as industry profitability strengthened.

"There's not a lot of dissatisfaction with workers' compensation among employers today," Hartwig says.

Hartwig points to rapid advances in technology which, he says, place the industry on the cusp of potentially transformative change.

"We are on the verge of major risk reduction in the area of workers' compensation," he says, with new technologies like autonomous vehicles, telematics and wearable technology increasingly being integrated into the workplace.

"That is likely to become one of the dominant drivers of claim activity as we head into the 2020s," Hartwig adds. "We're moving into the next generation of risk management."

But insurers must maintain discipline in underwriting and with respect to rate discounting. It was the cutting of prices to gain market share in previous eras of "the good times" that led to charges that ate into profits.

Hartwig says today's technology advances offer a better route to expansion: "You can grow through investment in technology to improve underwriting margins."

Today's workplaces are generally safer already because of the introduction of technologies such as robotics and data analysis, says the NCCI's Burton. As an example he cites the development of telemedicine to provide quicker help to workers injured on the job in remote locations such as oil drilling rigs, logging operations or at mining sites.

At Travelers, workers' comp head Rich Ives credits technology developments with making workplaces safer, but notes that new technologies can also usher in new sources of risk.

Nonetheless, Ives says: "We believe there are some very good technology advances that are going to help employers."

Ives lists such things as remote temperature sensors, accident avoidance systems and mechanisms that alert operators to potential hazards.

Safety first
Federal data confirms that US workers are less at risk of on-the-job injury. In 1970, 38 Americans died each day from work-related causes. By 2015, that number had dropped to 13 per day, according to the US Department of Labor.

Worker injuries and illnesses fell from 10.9 incidents per 100 workers in 1972 to 3.0 per 100 in 2015, department data shows. Some of the decline may reflect the economy's shift away from manufacturing, where risks tend to be greater. But overall, experts say the trend has been toward greater safety on the job.

Yet that long-term trend did not protect the industry from a period in the late 1980s and early 1990s characterised by outsized losses driven by rapidly rising medical costs and rates that did not keep up, Burton says. That led to calls for reform and the creation of state-run workers' comp insurance pools, including in California and Kentucky.

No new state fund has been created in 25 years, and many that were formed have either shrunk in size or converted to a form of mutual insurer, he adds. Democrats who distrust the industry have sought to keep them alive, he says, partly because some see the funds as a counterweight to private insurers' market power.

In Illinois, the Democrat-dominated state legislature recently passed and sent to Governor Bruce Rauner legislation that would set up a government-run fund in the Prairie State. The Republican was expected to reject the measure.

At Travelers, Ives points to a history that might suggest no such counterbalance is needed. As the largest US workers' comp insurer and among the oldest, Travelers can draw on over a century of history for risk assessment and claims evaluation.

Using data analytics and the expertise of dozens of analysts, the company built a predictive model that can spot workers' comp claims in which a chronic pain situation may develop. The company uses that insight to shape a treatment plan for individuals involved.

The model has been applied to some 36,000 claims and has reduced the need for surgery by 25 percent, curbed exposure to opioids and led to a 10 percent reduction in lost work days, Ives says.

He credits investments like this with helping Travelers cut costs to clients and it becoming the market leader in workers' comp, with a five-year average of beating the rest of the industry by 11 percentage points in its combined ratio for the segment.

"The use of analytics to help guide our claims practices is something that we have been investing in for a very long time," Ives says.

Chronic pain
Looking at the challenges facing the industry, Ives names chronic pain and opioid addiction as major current issues. According to the US Centers for Disease Control and Prevention, almost 2 million Americans abused or were dependent on prescription opioids such as oxycodone in 2014, with overdose deaths from the substances having quadrupled by then, compared to 1999.

Much of the problem is tied to pain treatments that lead to abuse, with estimates that as many as 25 percent of people who are treated with synthetic forms of morphine struggle with addiction. Travelers' predictive modelling project is aimed at tackling this problem.

Longer-term, says Ives, the rising number of Americans working past retirement age presents another set of elevated claim risks. People over 65 may comprise as much as 30 percent of the US workforce by 2050, which increases the risk of injuries stemming from obesity, senility and chronic pain.

Also, he says, the changing demographics of the American workforce raise the chances of workplace injuries that stem from inexperienced employees taking on tasks without adequate training or practice, as companies seek to replace older workers who do retire.

The risk is particularly evident in certain industries, such as construction, transportation and healthcare, he notes.

On average, first-year workers account for 27 percent of workers' comp claims, with a greater proportion of such claims categorised as catastrophic, Ives says. What's more, he notes, just 10 percent of claims account for 65 percent of costs.

The trend towards contract-based workers, such as Uber drivers, who generally are not covered by employer-based workers' comp may reduce the proportion of the workforce covered by such policies - and thus pose a threat to premium levels. "It's obviously something we're watching very closely," says Ives.

But the company also takes what might seem to be a contrarian view: "It's something that we would look at as maybe a potential opportunity," Ives concludes.

This article was published as part of issue Summer 2017

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