The workers’ compensation segment in Midwestern states is not immune to the broad trends in the line nationally — including poor combined ratios, escalating medical costs and severe underreserving — but no heartland state has a crisis as acute as the headline-grabbing California fiasco.
Most Midwestern states are attractive for carriers wishing to offer workers’ compensation, according to Jim Vandenberg, commercial lines manager at Sun Prairie, Wis.-based General Casualty Insurance Cos., which operates in 26 states, primarily in the Midwest.
“Workers’ compensation is pretty much available in all the Midwestern states,” Vandenberg told Insurance Journal. “There’s nothing like what’s going on in California. It is available to the public at a pretty reasonable rate.”
‘Nowhere behaves like California’
Sheila McGraw, workers’ comp claims manager at General Casualty, added that Ohio and North Dakota have exclusive state funds.
“Nobody really writes workers’ comp insurance there,” she said. Employers are allowed to self-insure in Ohio. “Missouri has a pretty competitive state fund, but nowhere [in the Midwest] behaves like California. Missouri’s state fund doesn’t have that much of a market share.”
Minnesota, Michigan and Nebraska also have competitive state funds, while the rest of the Midwestern states allow private carriers to provide the compulsory coverage. Indiana has long been considered a very good comp state, with combined ratios usually well under the national average. In 2002, for example, Indiana’s comp segment had a combined ratio of 91.0, compared to the national average of 107, according to data from the National Council on Compensation Insurance. The loss ratio, meanwhile, was 62.5, compared to the national average of 78.9. These added up, as would be expected, to an excellent return on net worth of 10.1, compared to the national average of 0.2, according to data collected by the National Association of Insurance Commissioners.
McGraw had kind words to say about General Casualty’s home state of Wisconsin.
“Even through the hard times in 2001, Wisconsin has been sustaining a profitable book of business. It’s a very good system, just as Indiana’s is. It’s very good at controlling costs and limiting litigation. The system is not set up for attorneys to represent injured parties. The system in Indiana, for example, is very conservative. Rates aren’t as high, but they reflect for the employer that kind of conservative system. Carriers can really make a lot of money in the state of Indiana. Wisconsin and Indiana are probably the two best.”
Illinois, on the other hand, is a tricky state for comp business because it is so heavily unionized, McGraw said. “States like Illinois that are highly litigious, it makes it very tough on the P/C and workers’ comp side,” she said. “People there seem to go right to their lawyer, sometimes even before the doctor. Michigan is much the same way especially around Detroit.”
Costs per claim continue to grow rapidly in Illinois, according to a study by the Cambridge, Mass.-based Workers Comp-ensation Research Institute. Between 1998 and 1999 (the most recent data analyzed), costs per claim there grew by 11 percent. They had jumped 10 percent between 1997 and 1998. Medical inflation was the culprit, the study’s authors claimed. Medical payments per claims increased 10 percent per year from 1997 to 1999. The study, CompScope Benchmarks: Multistate Comparisons, 1994-2000, examined workers’ compensation systems in 12 large states comprising 50 percent of national comp market on key performance measures. The other states included in the study were California, Connecticut, Florida, Georgia, Indiana, Massachusetts, North Carolina, Pennsylvania, Tennessee, Texas and Wisconsin.
The study found that claim costs in Illinois averaged $3,376 per claim in 2000, 30 percent above the median of the 12 study states. Medical payments per claim were the major cost driver — 43 percent above the median. Illinois was one of only four states in the study that did not have a medical fee schedule in place to help control costs. Average costs per claim in Wisconsin, in contrast, were $2,182, and only grew by 5 percent between 1998 and 1999.
Losses still piling up
Of course, the WCRI study doesn’t comprehensively cover the very costly 1999-2001 accident years. Several industry executives addressed the issue at a panel held during the Independent Insurance Agents of Indiana’s annual convention last November.
“The market was terribly underpriced in the late ’90s, and there’s a huge tail in comp,” said Jeff Haniewich, executive vice president of Fairfield-based Ohio Casualty Group’s commercial division. “Most companies have had tremendous developments from the 1999-2001 accident years.”
Underreserving is another widespread problem for carriers, which affects the prices they charge in the Midwest. As acknowledged in an op-ed piece distributed by General Casualty President Pete McPartland, the comp industry as a whole is underreserved by $18 billion, according to NCCI.
Joe Yeager, an Indianapolis regional vice president for Indiana Insurance Co. (part of the Liberty Mutual Group), said: “Reserving is always an issue in the comp field. Still, some of the insurers are getting smarter about risk selection. There continues to be a concern for us as a company in terms of profitability.”
It will only get worse, argued Jim Roe, president of the Indianapolis-based wholesale brokerage, Arlington/Roe & Co.
“Understanding the types of losses we’re really facing, it’s going to become pretty tight,” Roe said. “Workers’ compensation is a big issue and will continue to be very difficult.”
That said, the executives at General Casualty said a change in strategy after the 2001 debacle has allowed them to maintain healthy ratios while competing effectively. This involves very active claims management and a greater awareness of different market climates in the various Midwestern states.
“What we realized was that because of changes in how states administer workers’ compensation, in terms of claims and the legal environment, we really had to look at it on a state-by-state basis,” Vandenberg said.
“We can’t have one strategy that fits all states. We have to examine the underwriting issues and the historical profitability and figure out which states had the best profit potential, where we’re willing to write more business and be more aggressive.”
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