Expert Commentary

Workers Compensation Issues and Trends 2008—The NCCI Perspective

The Annual Issues Symposium—2008 presented by the National Council on Compensation Insurance Inc. (NCCI) again disseminated useful material related to workers compensation while also offering an overview of the issues and trends that impact the entire insurance industry.

Workers Compensation Issues
May 2008

NCCI Chief Actuary Dennis Mealy delivered a comprehensive review of current workers compensation results entitled "State of the Line." He began his presentation with a synopsis of the current results for the property/casualty industry. Private insurers experienced another good year in 2007 with a preliminary net combined ratio of 96 percent. This makes the third time in the last 4 years that the ratio has been under 100 percent. The workers compensation line also experienced another relatively good year with the 2007 preliminary calendar year ratio for private insurers coming in at 99 percent, representing the first time in at least 20 years that the industry has posted a combined ratio below 100 percent for two consecutive calendar years. But as was the case with the 2006 results, the California experience continues to skew the outcome for the entire country. Removing California from the mix would cause the calendar combined ratio for the remaining states to climb about 5 percentage points resulting in a calendar combined ratio of 104 for 2007. Mr. Mealy also noted medical claim costs continue to grow although at a slightly slower pace than in past years while claim frequency maintained its decline in 2007 but also to a lesser degree than in past years. Despite the generally positive results for the line, the long term outlook is a bit less certain driven by the unsure political climate, low investment returns on insurer portfolios, and the ongoing escalation of medical claim costs that continue to outpace inflation.

Mr. Mealy ended his presentation with an update on a couple of NCCI projects. The NCCI experience rating plan will be reviewed over a 2-year period to ascertain how well it is working. He provided several graphics to illustrate the impact of the current plan on premiums. Additionally, NCCI is in the process of completing revisions necessitated by the passage of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). The organization has received an updated terrorism model and its results from EQECAT. It is expected that there will be a national filing made to incorporate these new results in June with an anticipated effective date of September 1, 2008.

Workers Compensation Research Topics

NCCI Practice Leader and Senior Actuary Barry Lipton, along with NCCI Practice Leader and Chief Economist Harry Shuford, offered a research workshop that analyzed several issues including the "Factors Influencing the Growth in Treatments per Claim" and "Workers Compensation Tail Reserving." Mr. Lipton also provided his annual review of the use of "Prescription Drugs" in the context of workers compensation claims. The study indicates that the prescription drug component of total medical costs may be stabilizing. For the years 2003-2006, the prescription drug costs as a percentage of the total medical costs for a first-year claim in each of those years has hovered in the 2.6-2.8 percentage range. Additionally, the trended, estimated ultimate share that prescription drugs will bear to the total medical costs for these same accident years is pretty uniform as well ranging from 19.3 to 19.4 percent. Prescription drug utilization has also declined for a second year. This coupled with the increase in the use of generic drugs (up to 90 percent for 2006) may explain the stability being evidenced in the prescription drug element of workers compensation medical claim costs. Also included in the workshop was a review by Mr. Shuford of the "Shift in the Medical Share of Total Benefits." As has been the trend for the last 20 years, the medical share of total benefits continues to increase. The split between medical and indemnity in accident year 1986 was 55 percent indemnity and 45 percent medical. By accident year 2006, the medical share of total claims has risen to 59 percent with indemnity dropping to 41 percent. Even with some stabilization being seen in medical costs, the upward trending of medical costs as a percentage of total claim costs will continue due to inflation and utilization of medical services.

Workers Compensation Regulatory/Legislative Environment

Peter Burton NCCI Senior Division Executive—State Relations and NCCI Practice Leader and Senior Actuary Jeff Eddinger provided an in depth review of regulatory and legislative "Regional Trends". The pair first offered an overview of countrywide developments. They noted that this year there appears to be more state initiatives aimed at expanding compensability and benefits. Also observed relating to the benefits aspect of a workers compensation claim is that many jurisdictions are in the process of updating medical-oriented fee schedules like those relating to physicians and hospitals. The copresenters also supplied a state-specific review (grouped by region) of the current rate changes and legislative initiatives in the jurisdictions that NCCI serves as the statistical agent.

State of the Insurance Industry

As has become a tradition at the NCCI symposium, Insurance Information Institute (III) President and Chief Economist Robert Hartwig offered his view of the industry's future via his presentation "2008: A Make or Break Year for the P/C Insurance Industry?". Among the topics that Dr. Hartwig touched upon are the economic risks that currently face insurers and the resulting ramifications of these issues. For example, the subprime debacle and the credit crisis will create bond insurer problems and possibly directors and officers/errors and omissions exposures for some insurers. And, the downturn in housing starts will restrict the growth in the exposure base for the insurers who write homeowners insurance. Lower interest rates continue to impact the insurance industry as they have for several years reducing insurer investment income. In order to offset some of the issues that challenge the profitability of industry, Dr. Hartwig suggests that underwriters maintain discipline and pricing, and insurers be proactive regarding legislative and regulatory initiatives, and better manage the volatility and variability of their results.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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