Transcript Slide 1

A National Workers Compensation Overview
AASCIF Austin Workshop
Bruce R. Hockman
Towers Watson
[email protected]
T 215 246 1629
October 19, 2010
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A National Overview
 This
Business
SUCKS!!!
Any questions???
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A National Overview
No two carriers, public or private, approach the business the same way, but
there are common issues which, as they say in consulting speak, are “Keeping
company leaders awake at night”.
Loss Ratio Deterioration
Reduced Top-Line Revenue
Expense Ratio
Pressure
Medical Inflation
Personnel Development
Sluggish Investment
Market
Market Consolidation
Federal Intervention
Economy
Competition
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Indiscriminate Hair Loss
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A National Overview
Reminder: Unless you are a national writer, with proportional premium
distribution in each state,
National Statistics are:
a) dated
b) wrong
c) of little value for strategic decision making
→Trust your own data whenever possible as it is likely to be
a) timely
b) accurate
c) strategically reliable
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Market Consolidation
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Market Consolidation
A National Overview
Our Cozy little world of workers comp is getting smaller, and at the same
time more crowded.
10.4B
14.3B
39.7B
2004
$54 Billion
43.6B
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33.8B
2006
$54 Billion
State Fund
6.2B
2009
$40 Billion
Private Market
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Market Consolidation
A National Overview
 For
the last four years, the workers compensation market has been
consolidating.
Zenith (14)
→ Fairfax Holdings (49)
PMA (16)
→ Old Republic (15)
First Comp (61) → Markel (0)
 Why:
— Organic growth is not available
— Move towards “specialization”
— Existing market opportunities have “topped out”
Product Pointer:
Be mindful of ongoing consolidation among your distribution system.
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Top Line Revenue Slippage
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Top Line Revenue Slippage
A National Overview
The NCCI provided a detailed breakdown explaining the rationale for
this market collapse.
Change in loss costs
-7%
Change in carrier pricing
-4%
Change in total payroll
-4%
Change in industry mix
-5%
“Other”
-6%
But change was not uniform across the country?
California and Florida account for $6.5 billion of that lost business.
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Top Line Revenue Slippage
A National Overview
Premiums rise and fall for many reasons – and they will in the future.
$45
WC Net Premiums Written
$40
$35
$30
$25
$20
$15
$10
$5
$3.5
$3.7
$4.2
$4.8
$5.5
$6.2
$7.5
$9.4
$11.3
$13.2
$14.2
$14.6
$14.0
$14.0
$15.1
$17.1
$20.4
$23.4
$26.1
$28.2
$31.0
$31.3
$29.7
$34.3
$32.7
$29.5
$27.7
$26.5
$24.2
$23.1
$26.2
$27.1
$30.6
$32.9
$36.7
$39.7
$41.8
$40.9
$37.3
$32.5
$30.5
($ Billions)
$0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Cumulative Rate Change
→
+36.3%
-27.8%
+17.1%
-24.0%
Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.
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Lagging Investment Opportunities
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Lagging Investment Opportunities
A Natural Overview
Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11
($ Billions)
$70
$58.0
$56.9
$52.3
$51.9
$47.2
$60
$50
$42.8
$64.0
$59.4
$55.7
$48.9
$45.3
$44.4
$40 $35.4
$39.0
$36.0
$31.7
$30
$20
$12.6
$10
$0
94
95
96
97
98
99
00
01
02
03
04
05*
06
07
08
09 10:Q1
In 2008, Investment Gains Fell by 50% Due to Lower Yields and Nearly $20B of Realized Capital
Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income
1
Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
* 2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
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Lagging Investment Opportunities
A Natural Overview
Treasury Yield Curves:
Pre-Crisis (July 2007) vs. July 2010
6%
5%
4.82%
4.96%
5.04%
4.96%
4.82%
4.82%
4.88%
5.00%
4.93%
5.00%
3.80%
4%
Treasury yield curve is near its
most depressed level in at least 45
years. Investment income is falling
as a result
3%
2%
5.19%
3.99%
3.01%
2.43%
1.76%
0.98%
1%
July 2010 Yield Curve*
Pre-Crisis (July 2007)
0.62%
0.16%
0.16%
0.20%
0.29%
1M
3M
6M
1Y
0%
2Y
3Y
5Y
7Y
10Y
20Y
30Y
Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.
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Expense Ratio Pressure
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Expense Ratio Pressure
A National Overview
 Like it or not, when income falls someone is going to check on how much
free coffee is being consumed!
→In my experience, I have never seen a company go broke because of too
high an expense ratio.
Product Pointer:
Expenses should be properly managed in good times and times like
today. Remember, technology is terrific, but when was the last
time that a computer got an injured worker back to work?
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Expense Ratio Pressure
A National Overview
Cash flow in any business is important, in ours it is critical.
PC Industry
2008
Premium Collected
2009
$434.5
$423.4
Losses Paid
260.9
250.6
Underwriting Expenses Paid
167.7
168.2
Dividends to Policy Holders
2.6
2.7
Underwriting Cash Flow
($3.2)
($1.9)
Net Investment Income
$53.7
50.3
0.9
0.7
$57.9
$53.0
Other income
Pre-tax Operating Cash Flow
(Billions)
Product Pointer:
Model your cash flow situation under various scenarios.
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Loss Ratio Deterioration
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Loss Ratio Deterioration
A National Overview

Whether we look at calendar year data, or accident year data, the arrows
keep pointing in the wrong direction.
Pricing Levels
Frequency
Severity
Medical Inflation

2009 data showed the 4th consecutive year of marked deterioration in combined
ratios. We have seen nothing in 2010 to suggest that it will not be the markets
worst results since 2001.
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Loss Ratio Deterioration
A National Overview

Workers compensation loss results have always raised the industry’s
loss ratio average.
Accident Year Los/LAE Ratios
Line
2000 2001
2002 2003 2004 2005
2006 2007 2008 2009
Work Comp 109
100
85.5
74.8
64.
63.4
68.1
74.9
80.2
84.5
Commercial 84
83.6
70.5
61.9
59.8
64.1
58.9
61.5
70.7
67.5
All Lines
90.
76.5
67.3
64.3
69.3
62.9
66.1
75.2
74.2
90.3
→Medical inflation, increased severity, increased litigation, all play a role,
but price deterioration is playing a larger part.
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Loss Ratio Deterioration
A National Overview


We cannot talk about calendar year results without looking at reserve
development (positive or negative), and adequacy.
→ A.M. Best:
Workers compensation reserves are $1.8BB inadequate
→ NCCI:
$4BB deficient after discounting
Most “redundant” reserves built up between 2005 – 2009 have already been
released.
→ Reserve inadequacy over any sustained period of time will put your
company in jeopardy.
Product Pointer:
Watch for those “hidden bombs”
a) settled indemnity claims with open medical
b) cases in litigation
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The Economy
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The Economy
A National Overview
Length of US Business Cycles,1929–Present*
Duration (Months)
120
Length of Expansions
Greatly Exceeds Contractions
Contraction
120
Expansion Following
106
110
100
90
92
Average Duration**
Recession = 10.4 Mos
Expansion = 60.5 Mos
80
80
73
70
58
60
50
50
45
43
39
37
40
36
30
24
20
13
10
16
8
11
10
8
Nov
1948
Jul
1953
Aug
Apr
Dec
Nov
1957 1960
1969 1973
Month Recession Started
10
11
12
21
16
6
8
8
Jul
1990
Mar
2001
0
Aug
1929
May
1937
Feb
1945
Jan
1980
Jul
1981
Dec
2007
*August 2010 (likely the “official end” of recession was June 2009)
Sources: National Bureau of Economic Research; Insurance Information Institute.
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The Economy
A National Overview
US Unemployment Rate
8.8%
11:Q4
9.4%
11:Q1
9.0%
9.5%
10:Q4
11:Q3
9.6%
10:Q3
9.2%
9.7%
10:Q2
11:Q2
9.7%
4.5%
4.5%
4.6%
4.8%
4.9%
07:Q2
07:Q3
07:Q4
08:Q1
5.0%
07:Q1
6.0%
5.4%
7.0%
6.1%
8.0%
6.9%
8.1%
9.0%
10:Q1
10.0%
9.6%
9.3%
11.0%
10.0%
2007:Q1 to 2011:Q4F*
09:Q4
09:Q3
09:Q2
09:Q1
08:Q4
08:Q3
08:Q2
4.0%
*
= actual;
= forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/10); Insurance Information Institute
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The Economy
A Natural Overview
US Unemployment Rate Forecasts
Quarterly, 2010:Q1 to 2011:Q4
10 Most Pessimistic
Consensus/Midpoint
10 Most Optimistic
11.0%
10.5%
10.0%
9.5%
9.7%
9.9%
9.8%
9.0%
9.5%
9.2%
9.5%
9.4%
9.2%
9.0%
8.5%
7.5%
9.6%
9.6%
9.5%
8.0%
9.7%
9.0%
8.7%
8.4%
Unemployment will remain high even under
the most optimistic of scenarios, but
forecasts are being revised downwards
8.8%
8.2%
7.0%
10:Q3
10:Q4
11:Q1
11:Q2
11:Q3
11:Q4
Stubbornly High Unemployment Will Slow the Recovery of the Workers
Compensation Exposure Base
Sources: Blue Chip Economic Indicators (8/10); Insurance Information Institute
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The Economy
A Natural Overview
U.S. Nonfarm Employment, Monthly, 1990 - 2010
Millions
140
135
130
125
120
The number of employed
people in the US today is
approximately the same as
it was in late 2004
115
110
105
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
*As of July 2010; Not seasonally adjusted
Note: Recessions indicated by gray shaded columns.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
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What is next?
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What is next?
A National Overview
Historically, hard markets follow when surplus “growth” is negative*
The industry has excess capacity, but it is unevenly distributed.
(Percent)
Surplus growth is now positive but
premiums continue to fall, a
departure from the historical pattern
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*
NWP % change
Surplus % change
* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09.
Sources: A.M. Best, ISO, Insurance Information Institute
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A National Overview

To take just a longer view of things, here is some direction over the next
year or three:
 Survive
– Do the right things, regardless of short term pain
– Keep good people, doing good work, on good business
– Remember, you are not alone, and you have staying power
 Remain
vital and relevant in your markets
– You grew substantially just a few years ago
– Fight the “commodity” syndrome – add value to your offerings
 Thrive
– There is an end to every cycle, but everyone will not be positioned
to take advantage of it.
– Leadership is the key, followers fall by the wayside.
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