A new Conning & Company study reports that 90.4 percent of workers’ compensation insurers surveyed believed that the industry will see increased premium rates, suggesting that the era of price competition is ending.
Of this group, 32 percent believed that rate increases in the coming year would surge by as much as 20 percent. While these findings may bode well for the fiscal health of the workers’ compensation industry, it is not good news for businesses whose operating costs will rise as a result of increased rates.
According to the new Conning & Company study, “Workers’ Compensation: Resolving a Self-Inflicted Crisis,” price competition caused premiums to drop 21.6 percent from 1993 to 1998. The industry’s current state of distress can be attributed to insurers placing a priority on production over underwriting, that is, putting emphasis on premium growth at the cost of accurate risk analysis.
“A lot of the major workers’ compensation insurers are not going to write new business unless the price is right for them,” explained Geri Riley, Assistant Vice President at Conning & Company and author of the study. “The price wars that have crippled this market appear to be ending and companies should expect to allocate more money in workers’ compensation costs. It is too early to predict whether insured companies will be impacted enough to pass this increased expense to the consumers.”
For the bulk of the 90s, workers’ compensation insurers focused on growth because they assumed their return on investments would make up for their losses in rates. Once rates fell below profitable levels in 1997 and 1998, no insurer wanted to lose market share by being the first to increase rates, and competition continued, even though industry results were deteriorating. This downward spiral is responsible for the current financial turmoil of today workers’ compensation market.
Clearly, larger firms can afford to pick and choose in their underwriting because they have other lines to fall back on. Broken down by premium size, 18 percent of insurers with premiums under $100 million believed that they would raise premiums by 10-20 percent. This compares to 33 percent of firms with between $100 million and $500 million in premiums and 67 percent of firms with premiums greater than $1 billion.
When asked to rate the important issues concerning the competition and growth of the workers’ compensation market, insurers rated increased distribution capabilities and the growth of existing markets as more important than entering new markets or looking to acquire/merge with other workers’ compensation firms.
Almost all survey respondents thought introducing new technology was one way to reduce costs. While the use of technology can have many benefits, like expediting fraud detection and enhancing customer service, Conning is somewhat concerned about the emphasis of technology as a cost control. Technology projects often do not produce the desired results and can be very expensive to implement, thus becoming a target of expense control in themselves.
“In the past, workers’ compensation insurers have overreacted to high combined ratios by raising rates too much – and to abundant surplus by decreasing rates by too much. We believe they have learned their lesson and will act more rationally to this latest financial crisis,” said Riley. “Their biggest obstacle may be finding talented underwriters who can focus on loss and exposure analysis rather than competitive pricing.”
The Conning study, “Workers’ Compensation: Resolving a Self Inflicted Crisis,” is available from Conning & Company for $450 by calling toll free (888) 707-1177 or (860) 520-1521 or can be purchased through the company’s web site at www.conning.com. A complete listing of all Conning Strategic Studies can also be found by visiting the site.
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