The State of Workers Compensation

Each year NCCI issues an annual report on the “state of the line” for workers compensation. The entire report, prepared and presented by NCCI’s Chief Actuary, Dennis Mealy, can be found at www.ncci.com.

The State of the Line Report presents a historical and current perspective on national workers compensation trends. It includes data from both private carriers and state operated residual markets. It is an insightful document that can provide valuable data to PEO operators and risk managers.

Here are some of the highlights of the 2010 report (utilizing 2009 data).

Premium and Operating Data:

• Net written workers compensation premium declined by 11.8% The combined ratio (losses plus expenses) increased from 101% to 110%. This means that for every dollar of premium, losses plus expenses equaled 110%.
• The investment gain ratio was below historical averages. Historically carriers have been able to offset poorly performed combined ratios with investment income.
• When comparing cost to surplus, investment income was the largest positive contributor followed by unrealized capital gains/losses. Underwriting income was negative.
• Written premiums continued to decrease.
• 2005 premium was 47.8 Billion
• 2009 premium was 34.1 Billion

Interesting Demographics:

• Manufacturing and construction represented 20% of payroll and 40% of total premium
• Workers compensation expense represented 1.6% of total employee compensation
• At the end of 2009 reserve deficiencies were estimated at $9 Billion

Claim Cost Data:

• Indemnity cost increases (+4.5%) outpaced wage inflation (-1.0%)
• Claims cost increases (+5.0%) outpaced medical CPI (+3.2%)

State Residual Markets:

• Overall premium decreased and represented 5% of total premium
• Operated at a 115% combined ratio

What Does This Mean to PEOs?

1. Workers compensation is not performing as profitably for carriers as other property casualty lines.
2. It will continue to be difficult to attract new carriers to the PEO space. Recently Chartis announced that they had shed $2 Billion in workers compensation premium last year (2010). Other carriers are also limiting their monoline workers compensation capacity.
3. PEOs will have to be diligent in outperforming the general market dynamics. Specific tactics that may be utilized are:

• Ensuring all new claims are reported to the carrier within 24 hours of occurrence
• Ensuring that all involved parties—the injured party, client, and carrier are involved in the claims process and communications are clear between all parties
• Implementing effective return to work programs
• Working strategically with carrier adjusters or third party adjusters to ensure claims are managed and closed promptly
• Utilizing a “watch list” process to identify clients with performance issues. Working with underperforming clients to improve performance
• Providing meaningful risk control services at the client level
• Employing diligent underwriting in the client selection process

^{David E. Carothers is a Certified Safety Professional and Principal Risk Manager with Praxiom Risk Management in Tampa, FL. David is a founding and still active member of the Advisory Board to the Certification Institute for PEO Workers Compensation. He has also been a speaker at NAPEO conferences and authored several articles for the PEO Insider. Praxiom is a full-service outsourced Risk Management consulting firm specializing in PEO safety, loss prevention, claims management, insurance placement, and works with PEO clients nationwide. Email David at dcarothers@praxiom-rm.com for comments and questions. Click here for a full bio.}