Expert Commentary

Workers Compensation Issues and Trends 2007—The NCCI Perspective

The Annual Issues Symposium—2007 presented by the National Council on Compensation Insurance Inc (NCCI) provided insightful information related to workers compensation and also offered some interesting perspectives on other issues and trends that effect the insurance industry as a whole.


Workers Compensation Issues
May 2007

NCCI President and CEO Steve Klingel opened the symposium with a presentation entitled "Workers Compensation: An Effective Public/Private Partnership". Mr. Klingel reviewed the workers compensation system from the viewpoint of its three participant groups: injured workers, employers, and insurers. Using statistics from various insurance and governmental sources, he made a very compelling case that for all the rhetoric, the workers compensation system is meeting the needs of its shareholders.

The workers compensation "State of the Line" was delivered by NCCI Chief Actuary Dennis Mealy. He provided an overview of the property/casualty market results before delving into data specific to workers compensation. Of particular note with respect to the workers compensation is that the preliminary calendar year ratio (private insurers) for 2006 is 96.5 percent, the lowest the ratio has been in at least 30 years. However Mr. Mealy cautioned that this ratio would be 8-10 percentage points higher if the good loss experience from California was removed from the mix. Additionally, medical costs continue to climb as a percentage of total losses. In the last 20 years, the medical portion of losses has climbed from 45 percent of the total to 59 percent in 2006. This is not surprising since medical claim costs have been on an upward trend since 1994 with an annual change for the period of 1997-2005 at +9.5 percent.

Analysis of Workers Compensation Medical Cost Drivers

Since medical claim costs continue to escalate outpacing inflation, two presentations were devoted to taking a closer look at what is driving these cost increases. NCCI Practice Leader and Senior Actuary Barry Lipton presented the "Prescription Drug Study 2007 Update". Based on information gathered, he indicated that there appears to be a temporary leveling off of the prescriptive drug share of medical costs. But utilization remains the most significant driver of medical costs. The most popular drug group prescribed for claimants in 2005 were anti-inflammatory and pain relief drugs, accounting for about one-half of the total amount paid for drugs.

The analysis of medical costs drivers continued with NCCI Practice Leader and Chief Economist Harry Shuford presenting "Measuring the Factors Driving Medical Severity: Price, Utilization, and the Mix". From NCCI's analysis, he advised that claim medical severity continues to trend upward. Some of the factors cited as being responsible for the ongoing escalation of medical severity in workers compensation claims include price increases, the growth in the number of treatments, and the shift in the mix of the type of claims and treatment/services provided.

Workers Compensation Regulatory/Legislative Environment

Unlike other lines of property and casualty insurance, workers compensation is significantly impacted by the laws and regulations that govern it in the 51 jurisdictions. But workers compensation, along with the other property and casualty lines of coverage, seems to face the potential of an ever expanding role of governance from the federal level. Helen Westervelt, president of NCCI's Regulatory Services offered an overview of the legislative/regulatory trends across the country as well as those perking at the federal level. An update on "Key Federal Issues" was then provided by Mary Jane Cleary, NCCI's Washington Affairs Executive. A couple of issues that she reported on included the status of a Terrorism Risk Insurance Extension Act (TRIEA) extension and efforts to amend the McCarran-Ferguson Act. Cleary was followed by Mona Carter, National Policy Executive with NCCI who discussed "Multi-State Public Policy Issues". Included in her discussion was an update on the continuing challenges related to professional employers organizations (PEOs) and independent contractors that face regulators. The final segment in the regulatory/legislative module concerning "Regional Trends" was delivered by Senior Division Executive—State Relations Peter Burton and Practice Leader and Senior Actuary Jeff Eddinger, both with NCCI. The pair supplied a state-specific review (grouped by region) of current rate changes and legislative initiatives.

Insurance Industry Issues

The NCCI symposium additionally offered a forum for several topics that, although very relevant to workers compensation, also have broader implications for the entire insurance industry. Insurance Information Institute (III) President and Chief Economist Robert Hartwig offered his forecast for the future of the industry via his presentation "Overview & Outlook for the P/C Insurance Industry: An Industry at the Crossroads". Some of the observations he made as part of his analysis are that the record underwriting profit of 2006 is unsustainable, the 2007 market can expect to draft off the momentum of the 2006 market, rising investment returns will not be sufficient to support a deep, soft market, and that underwriters must continue to truly underwrite accounts to facilitate the profitability of the industry.

Katherine Swartz, professor of Health Economics and Policy at the Harvard School of Public Health, provided a report on "Financing Healthcare in the US—the Outlook for Reform". She advised that in 2005, 46.6 million Americans were without health insurance. Of that number, 58 percent fall in the 19-44 age range and 30 percent were considered middle class (having an income above the median of $46,300). Swartz suggested that these statistics serve to illustrate why there is more pressure to find solutions about how to fund health care and how to make it more accessible. States like Massachusetts, Vermont, California, and Illinois are in the process of trying to work through these issues.

"Influenza Pandemic Risk: Potential Impact on the Workers Compensation Market" was presented by Peter Ulrich, senior vice president of Risk Management Solutions. According to Ulrich, a pandemic is not a question of if—but when. As a consequence, even if the workers compensation insurance industry does not pay any claims, it will still be faced with significant legal costs associated with defending against the compensability of such claims. He urged businesses to design and implement business contingency plans that include provisions for pandemic disease.


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