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Market Trends

Recent news bits about P&C insurance and the Indiana economy that we come across from various sources.;

Workers' Comp Insurers Earned 5.9% Return in 2012
Workers’ compensation insurers nationwide received a return on net worth of 5.9% in 2012, down from 6.2% the previous year and below their 10-year average of 7.1%, according to the National Association of Insurance Commissioners’ annual report on insurer profitability.
The propriety report for all property-casualty lines showed that workers’ comp insurers are still recovering from the Great Recession of 2008 and 2009, when millions of workers left lost their jobs and payrolls shrank.
“Combined ratios are still too high — around 109% in 2012 and 106% last year,” said Robert Hartwig, president of the Insurance Information Institute. “It’s still necessary for rate levels to move higher.”
In 2012, several larger states, including New York and California, showed anemic returns on net worth of 2% and 3.9%, respectively, while Michigan and Texas showed healthy double-digit returns of 12.9% and 10.6%.
In Texas, the high returns came as workers’ comp rates were diving more than 50% due to fewer claims, fewer disputes and a 27% decrease in injury rates.
“We did not get hit as hard as other states in the Great Recession,” said Steve Nichols, manager of workers’ compensation services for the Insurance Council of Texas. “Now the cost savings from House Bill 7 in 2005 are really starting to kick in. Medical costs are down. Utilization is down. Fewer insurers are opting out of the system and new insurers are coming into the state.”
Meanwhile, Delaware continued to struggle. It’s 2012 return rate of 1% was the worst in the country for states that participate in the NAIC profit survey, but it beat the previous year’s return of negative 4.7%.
The Delaware Compensation Rating Bureau has requested a 41.75% increase in workers’ compensation loss costs, and the Property Casualty Insurance Association has praised Gov. Jack Markel for appointing a task force to identify and address cost drivers like excessive utilization and high medical costs.
The NAIC's profitability report is based on data supplied by private and state-run insurers to state regulators. But only about half of the state workers’ compensation funds supplied data for the report, including California and New York.
The 11 states that didn’t supply state fund data were the four states that run monopoly systems -- North Dakota, Ohio, Washington and Wyoming -- as well as Colorado, Maryland, Montana, Nevada, Oklahoma, Pennsylvania and South Carolina. The far smaller numbers provided for private insurers in those states don’t necessarily give an accurate picture of actual insurer returns statewide.
Hartwig said workers’ comp insurers saw slight improvement in underwriting results in 2012, while investment numbers continued to weaken. Those trends carried through into 2013, he added.
“Investment income continued to fall in 2012 and 2013,” Hartwig said. “Underwriting and overall returns may increase marginally, but with some investment headwinds.”
He noted that property-casualty insurers haven’t fully participated in the equity market rally in recent years because their portfolios are overwhelmingly made up of bonds, which haven’t done as well as equities. In 2012, those portfolios held 65.4% bonds, compared to only 18.4% in common equities.
For workers’ comp insurers nationwide, underwriting returns as a percent of direct written premium were negative 8.6% in 2012, compared with negative 8.7% in 2011 and negative 19.6% in 2010. They averaged negative 5.8% for the decade ending in 2012.
While the Great Recession hardly caused a ripple for workers’ comp insurers in Texas, where returns have averaged 11.7% over a decade, other states, such as New York and Illinois, suffered severe blows.
Workers’ comp rates were already weakening when the financial crisis hit in 2008, and the loss of millions of jobs eviscerated payrolls. “We lost 2.3 million construction jobs, and we’ve only gained 400,000 back,” Hartwig noted.
New York’s returns averaged more than 7% from 2003 to 2007, but slipped to a meager 1.4% from 2008 to 2012.
Pre-recession, Illinois’ returns averaged above 5% before sinking into negative territory in 2008, 2009 and 2010. Things began to turn around in 2011, the year it adopted a 30% reduction in its medical fee schedule.
The effects of Illinois’ reform legislation may have helped push returns to 5.1% in 2012.
California had four exceptionally robust years leading up to the recession, before slipping steadily to a return of 3.9% in 2012. Hartwig attributed the slide to rate reductions and to backsliding on workers’ comp reforms passed under Gov. Arnold Schwarzenneger.
While California rates may be headed higher now, the lag time before they show up on insurers’ bottom lines may partly explain the state’s poor performance in 2012, he added.
Returns on net worth for Massachusetts workers' comp writers have rebounded strongly since the recession, climbing steadily from 3.6% in 2009 to 9.9% in 2012.
In March 2012, the Massachusetts Compensation Rating and Inspection Bureau proposed an 18.8% increase in rates, but state Insurance Commissioner Joseph Murphy rejected it entirely. On Dec. 30, the MCRIB filed for a 7.7% rate increase.
Looking forward to 2014, Hartwig said he expected to see scattered reform efforts and somewhat higher rates.
He said one significant variable in insurers' prospects for earning strong returns is the Terrorism Risk Insurance Act, which expires at the end of the year. Hartwig said that if the bill is not renewed, insurers will begin to feel pressure to manage their exposure by cutting back on lines such as workers’ compensation.
“That will mean there will be less coverage available and it will be more expensive,” he said.


Research completed by a Networks Financial Institute, Indiana State University, has concluded that because the failure of American International Group in 2008 did not adversely affect major insurers, systemic risk is not a feature of the insurance industry.


While some policy analysts have suggested that the presence of systemic risk among insurers necessitates changing the governmental level at which all insurers are regulated, the policy brief, available at www.NetworksFinancialInstitute.org, suggests otherwise.

National Underwriter NU Online News Service article 
Robert P. Hartwig of the Insurance Information Institute: “The reality is there’s not a strong association between what goes on the in the economy and what goes on in our business.” 
Recessions have historically occurred together with both hard and soft markets. Highlighting the workers’ compensation line, Hartwig said the underwriting cycle has had a bigger effect for insurers than the economy.

“As wages, salaries and payrolls fall, that is something that is contributing to a decline in workers’ comp premiums, although most of that is driven by what is going on in rate—very competitive pricing in workers’ comp,” he said.

While industry capital plummeted with investment losses last year, and capital losses are typically a precursor of harder markets, “something else has to change—the perception of risk,” he said.

Workers compensation insurers are likely to face falling rates this year, according to Standard & Poor’s Corp. The article—“Weakening Rates Could Squeeze U.S. Workers Comp Insurers Later This Year”—says rates have been declining, which is significantly reducing the margins of workers comp insurers. The declining prices have not led to weak insurer performance so far because of state reforms that have contained loss costs and led to better earnings.

“But such measures can only forestall the inevitable for so long, and the ratings on workers compensation insurers could face negative pressure in the latter part of 2008 and in 2009,” according to the report.

S&P noted that workers comp insurance is highly regulated, with regulations differing in every state. “That alone would make this a very challenging business to be in, but players in this market must also contend with the long-tailed nature of claims, persistently high medical cost inflation, and the possibly disruptive effect of periodic reforms and state-run funds,” said S&P.

Indiana catastrophic insurance claims were the highest of any state in 2006. Indiana experienced $1.5 billion in claims. Indiana was hit by two spring storms
    • 4/02/06 Final Four storm = $60 million
    • 4/14/06 hail storm = $1.3 billion & 282,500 claim
Missouri was second, with $878 million in claims, and Tennessee third, with $873 million. Source: ISO in IBJ Daily 01/17/07

For a narrative summary of Indiana workers compensation results for 2005, please read the article titled "2005 Another Healthy Year for Workers Compensation" by Duane Schroeder featured in the Big I Focus Magazine, November 2006.

Weiss Ratings Inc. news release titled "Property and Casualty Insurance Failures Drop 44% in 2005" shows insolvencies are down in 2005.

Life & Health

*From 1/12/04 news release. Older years carried forward in table for comparison purposes.

Melissa Gannon, vice president of Weiss Ratings, Inc. observed "However, an individual company’s financial situation doesn’t necessarily mirror the performance of the industry, so consumers must continue to monitor the financial safety of any company with which they choose to work."

National Underwriter reports that 2006 was a mild year for catastrophes compared to the four major storms in 90 days in 2004 and Hurricanes Katrina, Rita, and Wilma in 2005. Katrina was the worst single event of all time with $35 billion in total insured losses. After two years of record losses and rising reinsurance costs, risk-based pricing requires an increase in premiums. "The lack of catastrophes this year will create its own set of problems, including accusations that we cried wolf when we raised rates and are now price-gouging," said Edmund Kelly, CEO of Liberty Mutual. "It's like saying someone who survives Russian roulette faced no risk just because the gun didn't go off when we all know there is still a bullet in the chamber, and if you play the cat game long enough, it's going to go off."

Indiana's self-employed account for 2 percent of nation's total. The number of self-employed people in Indiana grew 3.5% from 2002 to 2003, less than the national pace of 5.7%, according to the U.S. Census Bureau. In 2003, Indiana had 340,365 self-employed people, who generated $12.9 million in revenue. The largest number of self-employed people were in construction, followed closely by retail. Nationally, there were more than 18.6 million self-employed people in 2003. The growth nationally represents the largest increase in self-employment since the Census Bureau began tracking the statistics in 1997. Nationally, these small businesses made up more than 70 percent of all businesses, with receipts nearing $830 billion.


A Marsh, Inc. study titled "Casualty Cost of Risk 2004" shows that for every $1,000 of revenues, U.S. businesses spend an average of $2.32 on insurance and other measures to manage their primary casualty risks:
    • $1.46 - workers compensation
    • $0.55 - general liability
    • $0.31 - auto liability

Viewed another way, in terms of for every dollar spent by U.S. industry to manage its primary casualty exposures:
    • $0.63 - workers compensation
    • $0.24 - general liability
    • $0.13 - auto liability

The study found that large employers generally enjoy substantial economies of scale in the purchase of insurance and use of other risk mitigation approaches to address their primary casualty exposures. Notably, the costs for small employers are nearly 16 times more than they are for the largest companies. Firms with more than $10 billion in revenue have risk costs associated with their casualty programs of $1.38 per $1,000 of revenue, a fraction of the $21.75 for those with $200 million in revenue or less.

A.M. Best reports that 38 property/casualty insurers became insolvent in 2002. Insolvent means a company is placed under regulatory supervision or into liquidation. The special report is titled "Rising Number of P/C Company Impairments Continues Trend." 51% became insolvent due to deficient loss reserves. Insolvency rate from insufficient reserves, prior to the year 2000, has historically ranged from 30 to 35%.


Due to the old data used in the ratemaking process, especially in regards to medical costs, is the NCCI ratemaking process adequate? That was a question asked at the Workers' Compensation Educational Conference, organized by the Florida Workers' Compensation Institute, National Underwriter, and the Risk and Insurance Management Society, Inc. Dennis Mealy, chief actuary, noted that the NCCI ratemaking methodology had been examined by a consulting firm and it found no major problems. However, NCCI will be reviewing its data collection process looking at:
  • econometric modeling (statistical analysis to explain variables)
  • collecting data more frequently from carriers
  • discussing the ratemaking methodology with other state rating bureaus

This is an interesting report written by veteran industry analyst Ted Belton. A primer for those for whom a hard market is a new experience and a brushup for industry veterans whose memories have dimmed with the passage of time since the last hard market hit in the mid 90's.
Reprinted with permission from The Belton Report Vol. 14, NO. 1, June 2002.

The U.S. Department of Health and Human Services (HHS) released its final medical privacy regulation. It has little impact for workers' compensation. The rule contains a "minimally necessary" clause and a statement in the preamble that it is not intended to interfere with state workers compensation systems. The rule requires "covered entities," (physicians, hospitals, health plans, and other medical providers), to disclose only the amount of medical information deemed by the provider to be "minimally necessary" to insurers in workers' compensation cases.

The rule was first issued in December 2000 and finalized in August 2002. Its purpose is to protect the use of individually identifiable health information by health plans, health care clearinghouses, and certain health care providers. All HHS press releases, fact sheets and other press materials are available at http://www.hhs.gov/news.

ISO and the National Association of Independent Insurers (NAII) reported that the P/C insurance industry suffered its first ever full-year net loss last year--$7.9 billion after taxes. The loss was caused by severe underwriting losses and lower investment gains. Also, the combined ratio for 2001 was 116, which was 5.9 points worse than the 110.1 for 2000. Only two other years showed poorer results: 1985 was 116.5 and 1984 was 118.

The workforce is aging - 1 in 3 workers is over 55. The Monthly Labor Review projects the number of workers between the ages of 55 and 64 to increase by nearly 50% by 2025.

Reinsurance Association of America (RAA) reports the worst year ever for reinsurers, who realized a combined ratio of 141.6 in 2001. This means that for every $1.42 paid out in claims and expenses, only $1 in premium was collected. The next-highest combined ratio was 128, posted in 1984. The top five global reinsurers by gross premiums written, according to A.M. Best Co.'s 2000 rankings, were: Munich Re, Swiss Re, GE Global Insurance Holdings, Berkshire Hathaway, and Hannover Re.

SwissRe market outlook: 2001 was the worst year ever for commercial insurance. The hard market should continue for several years. The Sept. 11 terrorism could cost the insurance industry as much as $50 billion, total insured and uninsured losses might be as high as $90 billion.

Putting that in perspective, SwissRe suggests that damage from a major earthquake in California could reach $300 billion, and a hurricane in Florida could cost as much as $80 billion. Accordingly, the insurance industry would still be responsible for carrying about $40 billion to $50 billion of exposure for either event.

A recent study from the Mayo Clinic concluded that using a computer for as many as seven hours a day does not increase the risk of developing carpal tunnel syndrome. Not only does the study cast doubt on the heavily debated OSHA ergonomics regulations, it also brings into question the validity of worker's compensation claims based on carpal tunnel syndrome. (source: reported by the Indiana Chamber of Commerce in INside Edge)

Indiana Premium Tax Cut Enacted - The insurance premium tax rate will be reduced from the current rate of 2% to 1.3% over 5 years. The tax applies to gross premium on insurance policies written in Indiana. The Indiana General Assembly overrode the governor's veto of HB 1150-00 which was passed in the 2000 year session.

President Clinton Friday signed the Electronic Signatures in Global and National Commerce Act, or E-Sign. E-Sign will render digital signatures legally equivalent to signatures on paper.

Speedy Filing of Claims Saves 15%. A company's prompt reporting of workers' injuries can save money. A study by The Hartford Financial Services Group, Inc., found that claims filed five or more days after an injury cost an average of 15% more for medical and income-replacement benefits than similar claims that had been filed promptly.

The Hartford analyzed more than 30,000 lost-time workers' compensation claims over a five-year period from 1994 - 1998. The injuries fell into three categories -- back injuries, carpal tunnel syndrome and other nerve disorders, and miscellaneous injuries -- which represent about two-thirds of all lost- time workers' comp. claims. The study excluded claims for open wounds, fractures, and dislocations, which are already typically reported within 48 hours of occurrence.

The analysis shows early reporting of nervous disorders such as carpal tunnel syndrome can save an average of 20% of medical and lost-time costs. Delaying reporting of a back injury increases claim costs by an average of 10%, and all other injuries cost 12% more.

Soft-tissue injuries, such as back injuries or sprains, can be particularly vulnerable to delays.

President Clinton signed the Financial Services Modernization Act (S. 900) also known as the Gramm-Leach-Bliley Act. It repeals Depression-era prohibitions on the merger of banks and securities firms, and overturns the 1956 Bank Holding Company Act's separation of banking and insurance. This separation had already been rendered obsolete on insurance sales matters by the US Supreme Court decision in the Barnett Banks case.

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