We have arrived in the new millennium despite all the predictions of Y2K bringing technology to a halt, markets breaking down, and perhaps Armageddon. It appears that the business world is operating in a state of business as usual as we enter this first decade of the new millennium
Will the business world continue to operate in a business as usual mode for the next 10 years? History clearly tells us that it will not. Looking back over the last several decades, our business world has changed dramatically, particularly in the areas of globalization and internet commerce.
The United States is no longer the leader in every market segment and product. Goods and services are now sought from sources around the globe. Consumers can now buy everything from flowers to automobiles on the internet. Businesses can now buy products ranging from office supplies to banking services on the internet.
The way we buy and sell goods and services, and the sources from which we buy them, have changed forever.
Will the insurance business world continue to operate at business as usual through the next decade? Historic underwriting cycles tell us that pricing will change at a minimum. But will workers' compensation in particular, the way we know it today, remain the same for the next ten years? For those of us in the workers' compensation business, that is a multi-billion dollar question!
Workers' compensation will not likely remain in a business as usual state. Looking back over the prior decades of workers' compensation experience may provide us with some interesting clues on what the next ten years will bring in workers' compensation.
This article will take a retrospective look and conclude with some predictions on what workers' compensation will look like during the next ten years. Predictions may be laughed at, but surely we can do no worse than those who have predicted what Y2K would do to our world as a whole!
Pre-1960s: Providing basic workers' compensation coverage
Workers' compensation became an insurance product at the last turn of the century. With the first state workers' compensation law passed in 1911, the birth of a new insurance product, workers' compensation insurance, took place in the US.
The concept of quid pro quo (providing something in exchange for something) was accomplished. Workers' compensation coverage for a work related injury was provided in exchange for avoiding a law suit by the injured employee.
Over the subsequent five decades, the only major change that occurred in workers' compensation was that all states eventually passed a workers' compensation act and an expansion of insurance coverage followed, with most major property/casualty insurers writing this line of business.
The nation lived through a depression and two world wars. The US faced a lot of distractions through almost half of the 1900s. Workers' compensation was the least of the worries.
The 1960s: A demand for more than coverage in workers' compensation
It wasn't until the 1960s that employee benefits, designed to attract and retain employees, became an issue in our economy. The economy was rapidly expanding, finding and keeping good help became a challenge, and employees began to expect more than a paycheck in exchange for their labor. Companies provided health insurance, disability insurance and workers' compensation coverage and other coverages, yet employees began demanding more than just coverage. Employees began to seek out employers who offered the most liberal benefits under all forms of insurance coverage.
The benefits provided under workers' compensation insurance coverage varied tremendously from state to state and, in many cases, were considered inadequate to provide care to the injured employee. Many state workers' compensation laws placed low caps on all forms of indemnity benefits as well as significant limitations on medical benefits.
The 1970s: Benefit enhancement in workers' compensation
As we entered the 1970s, the country was again experiencing tremendous change. The Vietnam war, the peace movement and civil rights spilled into the 1970s from the late 1960s. There was continued dramatic unrest and double-digit inflation was soon to become a reality in the US.
In 1972, the National Commission on State Workers' Compensation Laws issued 84 landmark recommendations on the workers' compensation system after a thorough review of the wide variations and perceived inadequacies in state workers' compensation systems. A number of these recommendations changed workers' compensation dramatically during the 1970s. Those recommendations included:
The 1980s: Inadequate workers' compensation rates
Every benefit has its price, and workers' compensation insurers began to pay dearly in their efforts to provide the benefits that were expanded throughout the 1970s. Higher indemnity benefits, unlimited medical care and mandatory vocational rehabilitation raised loss costs rapidly. Rates for workers' compensation premium were simply inadequate to keep up with the provision of these enhanced benefits. As a result, insurance availability began to shrink and the involuntary or residual market (also known as the assigned risk pool) became a reality.
In the short term, the residual market was welcomed, helping insurers to rewrite a book of workers' compensation business by allowing them a mechanism for refusing to renew or offer coverage to potentially unprofitable business.
The cost of providing coverage for employers who found themselves in the residual market would be borne by all insurers through the residual market load (RML), in essence creating a reinsurance methodology at the first dollar level.
In the long term, the RML gradually grew to be a significant burden for insurers. In some states like Massachusetts, the RML added an expense to the insurer of almost $0.25 on every $1.00 of premium charged in the voluntary market. In Maine, the entire voluntary market essentially collapsed because of a RML that insurers could no longer bear.
In addition, the establishment and growth of workers' compensation self insurance groups and captive insurance companies became an option for those employers with better loss experience who wanted predictability and stability for their future workers' compensation costs.
The 1990s: Reform ironically leading to worse workers' compensation results
The National Council on Compensation Insurance (NCCI), the primary rate-making organization for most states, began to provide states with justification to increase workers' compensation rates in the late 1980s. Rate strengthening appeared to be the answer, but the reality of higher workers' compensation costs for employers, whether in the voluntary or residual market, was politically incorrect. State legislators feared losing their business base and had no choice but to reform their workers' compensation laws, reducing and placing more control on benefits. Oregon was the first state to radically reform its law in 1989, and states like Texas followed in 1991. By 1995, significant law changes were passed in a number of the large population states including Pennsylvania, Georgia, Florida, Minnesota, New York and last, but not least, California.
Workers' compensation reform was quickly followed by workers' compensation rate decreases despite all the rate strengthening that took place between 1988 and 1992. Again, political reality prevailed, with state legislators wanting to please business owners in their respective states. Workers' compensation insurance rates were typically before prior to the full impact of a reform was actually proven. For example, Pennsylvania reduced rates by more than 35% in the same year of its workers' compensation reform, despite estimates of reform impact on loss cost reduction of no greater than 20%.
In addition to rate decreases, insurers began to report calendar year combined ratios of 100% or lower by releasing reserves from prior years in response to the reforms. The reductions in benefit costs offered by reforms and these “improved” combined ratios brought a surge of insurers back into the workers' compensation marketplace. Numerous monoline workers' compensation insurers also entered the scene and began to gain significant market share. The residual market shrank incredibly from more than $4.5 billion in 1992 to less than $750 million by 1997.
Despite massive rate decreases, insurers competed heavily for the business, offering greater scheduled credits, greater rate deviations and stronger dividend programs than ever offered in the past. In 1997, for example, rate decreases accounted for 7.4% of price reduction but the use of scheduled credits, deviations, large and small deductible credits and other discount mechanisms, accounted for an additional 18.8% in price reduction!
Compounding price reductions finally took their toll on the industry. What started out as a decade of workers' compensation reform and improved results, ended with industry combined ratios estimated at 125% for 1998 and perhaps even higher in 1999. In California, industry combined ratios for 1998 and 1999 approached an estimated 140%. Both loss and expense ratios rose rapidly to unacceptable levels.
2000 to 2010: Stability in workers' compensation?
The past is rather depressing. It seems as though insurers and legislators can't seem to find the right balance of benefits that are considered adequate at a price that is also adequate for providing these benefits. Reform has led to reductions and more controls on benefits through excellent initiatives like managed care in workers' compensation. But rate decreases and competitive pricing continue to erode any positive impact of reform.
So what can we predict will happen in workers' compensation in the next 10 years? Here are several predictions based on the past:
1. Rates will stabilize and begin to increase in small increments for at least the next five years. Evidence of this trend has already been seen in a handful of states. California has already passed a substantial 18% increase for 2000, but most states will pass single digit rate increases in any given year.
2. Competitive pricing will lessen among the larger property/casualty writers of workers' compensation who have experienced combined ratios in excess of 120% over the past two years.
3. Smaller monoline writers of workers' compensation will continue to offer substantial scheduled credits, rate deviations and dividends to gain even greater market share, taking advantage of the price strengthening attempts of the larger multiline insurers.
4. Larger multiline insurers will acquire the smaller monoline insurers, gaining back the market share and rewriting the book more profitably.
5. Growth of the residual market will be minimal as there are enough insurers continuing to offer workers' compensation coverage.
6. Further workers' compensation reform is unlikely because benefit provision can no longer be blamed for the problems in workers' compensation - it is pricing that continues to be the problem.
7. Use of the internet will expand in workers' compensation for tasks like reporting of losses from employers to insurers, and from insurers to employers, in an attempt to reduce insurer expense ratios.
8. Self-insurance groups and captives will experience growth through employers joining them that are weary of the fluctuations in pricing.
9. The rise and stall of integrated benefits (also known as 24-hour coverage) will remain in the stalled mode. Integrated benefits efforts have simply not proved to reduce costs in workers' compensation, disability insurance or medical insurance to date.
10. Insurers who sincerely and effectively deliver accident prevention and excellence in claims and medical case management will be the only major winners throughout this new millennium.
While there are other predictions that can be made, this list encompasses the top ten. Workers' compensation is a line of business desperately needing stabilization in pricing. Workers' compensation is too critical to the health of business in general, providing the long-standing quid pro quo between employer and employee. Reaching a satisfactory balance in achieving the quid pro quo for all parties who participate in workers' compensation simply must happen in this first decade of the new millennium.
Analysis of Workers' Compensation Laws, U.S. Chamber of Commerce, 1999 Edition, Washington, DC. 1999.
Annual Statistical Bulletin, NCCI, 1999 Edition, Boca Raton, FL, 1999.
Workers' Compensation Issues, NCCI, 1999 Edition, Boca Raton, FL, 1999.
Workers' Compensation Claims Law, American Educational Institute, Basking Ridge, NJ, 1985.
Mr Gice came to ManagedComp from Providers' Assurance Corporation, a Brentwood, TN based private company dedicated to working with premier healthcare providers, where he was president and chief operating officer. Mr Gice was previously employed at EBI Companies, the workers' compensation specialist of Orion Capital, where he was president and ceo.
Mr Gice's expertise is in the areas of insurance and rehabilitation. He holds a masters degree in rehabilitation counseling, as well as rehabilitation designations of CRC and CDMS. He has 20 years experience in workers' compensation, holding insurance designations of CPCU and ARM.