It’s unlikely that workers’ compensation writers will see that line of business turn around anytime soon, despite large-scale workers’ compensation reform bills enacted in several states this year, said Edward Keane, a senior financial analyst at A.M. Best.
Keane said the deterioration that workers’ compensation insurance has seen during the past two years will continue at least until mid-2012, unless the economy makes a dramatic improvement before then.
“I think the way things are going, results are going to get worse before they get better,” Keane said, adding that for 2011, A.M. Best is projecting a 121.5% combined ratio. Last year, the combined ratio for the line was 118.1%.
The grim outlook for workers’ compensation insurance has also affected the ratings given to some insurers that write policies in that line of business, Keane said. Through mid-September, A.M. Best has issued 13 negative rating actions compared to six positive rating actions for companies that focus on workers’ compensation. “We expect that trend to continue into 2012,” he said.
However, the news on the workers’ compensation front isn’t all bad, Keane said. Premiums for workers’ compensation coverage are starting to rise in California, Florida and New York — three of the largest workers’ compensation markets in the country.
That is little comfort to industry observers who say the changes aren’t coming fast enough, especially because 2012 is an election year. “During election years, politicians and regulators tend to stay away from touchy issues like workers’ compensation” said Peter Burton, senior division executive for state relations at NCCI Holdings Inc., which tracks trends in the workers’ compensation industry.
The troubles facing workers’ compensation insurance garnered increased attention recently following a study released by NCCI, which found the frequency of workers’ compensation claims increased for the first time since 1997. The NCCI report attributed the increase to a confluence of factors stemming from the ongoing economic recession.
The report found claim frequency for workers’ compensation injuries increased by 3% in 2010. Prior to this year’s uptick, claim frequency had been declining at an average rate of 4.3% per year since 1990, with only 1994 and 1997 seeing increases (Best’s News Service, Sept. 28, 2011). While claims frequency was up, the increase in average indemnity and medical costs per claim decreased in 2010.
NCCI said the recession sparked several changes in the market that sparked an increase in claims frequency, including a shift away from the manufacturing and construction industries in 2010; an increase in the average number of hours worked per week for the first time since 2008; and overstatements made by employers in final payroll estimates.
“We have seen from some of our members that after conducting audits, insurers have had to return some premiums they had collected because employers had over estimated what their final payrolls would be. The down economy has created a number of factors that are acting together to create an overall precarious situation for the workers’ compensation line of business,” said Rita Nowak, assistant vice president for commercial lines at the Property Casualty Insurance Association of America.
That said, the industry did score some legislative victories in states like Illinois, Kansas, Montana and Oklahoma, all of which passed comprehensive workers’ compensation reform legislation during the 2011 legislative session.
But even those bills may have only a limited impact on the state of the workers’ compensation market, said Bruce Wood, the American Insurance Association’s associate general counsel and director of workers’ compensation.
The Kansas reform package was “primarily an effort to overturn some adverse case law that had developed in recent years” and in Illinois, “the jury is still out on whether that bill will actually save as much money as some have claimed it will,” Wood said. “That all depends on how the new fee schedule is implemented and how much of an optimist you are.”
The Oklahoma package that passed last month also included a new fee schedule for medical procedures that were designed to reduce costs by 5% and established specific reimbursement levels for certain procedures and services, including MRIs, durable medical equipment and prescription drugs. Those changes were enough for NCCI to recommend that the Oklahoma Department of Insurance lower the rate of workers’ compensation insurance by 1.7% (Best’s News Service, Aug. 26, 2011).
Aside from the new fee schedules adopted in Illinois and Oklahoma, workers’ compensation insurers are still facing financial pressures stemming from rising medical costs. That is especially true when it comes to pharmaceutical drugs.
Nowak said prescription drugs account for about 19% of all workers’ compensation medical costs, and in the past, many providers have engaged in “questionable” practices like prescribing repackaged medications that were sold at an inflated cost.
More recently, workers’ compensation insurers have begun pushing back against providers who have been prescribing compound medications, or medications that include more than one active ingredient and are therefore more expensive. Nowak said that trend was really an “opportunistic pricing scheme that only put more financial pressure on [insurance] companies.”
The California Legislature recently passed legislation that would limit how compound drugs could be prescribed and how much those drugs could be sold for. That bill, A.B. 378, is currently awaiting Gov. Jerry Brown’s signature.
“These pricing schemes aren’t about helping workers,” Nowak said. “We should be focusing on implementing positive controls to keep costs down while ensuring that we are giving injured workers the treatments they need.”
(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)
