The workers’ compensation industry in the years ahead will exist much as it has for decades in many respects. Policyholders will purchase coverage from either an agent or a company, with a portion of the market deciding to join the self-insured crowd. Some will be interested in few company attributes other than price, while some will look to their insurance provider for true value-added services. The most commonly seen services would be in the area of loss prevention, policyholder access to claims data, and a relationship with their insurance provider that leads to lower experience mods, and ultimately, lower costs.
Where the industry may begin to diverge from historical practices and present unique challenges, we believe, will be in a couple of key areas. First, the biggest single change in the past 20 years has been a shift from indemnity losses as the primary driver of loss costs to medical losses. In the past 20 years, medical costs have gone from 40 percent of total compensation losses to 60 percent as of 2010, and they are projected to be 75 percent of total compensation losses by 2019. Clearly, understanding medical loss components and their respective trends are going to play an increasingly important role in our industry. Reserves established on prior development models will ultimately prove inadequate in most cases.
Second, top line growth has become much more difficult in today’s economic environment. Our country has lost 8 million jobs in the past three years, resulting in the workers’ compensation industry losing roughly 20 percent of annual premiums. Many of those jobs appear to be lost forever. Manufacturing and construction, two of the primary growth engines of prior economic recoveries, are not rebounding as they have historically. Job growth, and more importantly, payroll growth, has been much slower than recoveries of the past. Average wages in many industries have also taken a nosedive. As a result, top line growth will be slow for the immediate future, particularly given the current pricing environment.
Challenges always present opportunities for those willing to spend the time to understand the issues. Insurance companies have vast amounts of data at their fingertip, on literally hundreds of different issues and concerns. We believe there are substantial benefits waiting for the company that digs into its data, gains a better understanding of its customers and their environment, and takes the innovative action necessary to capitalize on those opportunities. While our industry has long survived by looking through the rear view window, now more than ever is the time to look ahead, understand the winds of change blowing through our industry, and act accordingly.
Britt is president of Accident Fund Insurance Company of America, a workers’ compensation writer based in Michigan that expanded nationally in 2000 and is now licensed in 49 states and D.C. The company will itself turn 100 years old in 2012.
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