NCCI's Kocher & Lannutti Review Workers' Comp Market And Outlook For Future

David A. Kocher, president and CEO of the National Council on Compensation Insurance, and Nick Lannutti, senior vice president and corporate actuary, told an audience of insurance executives this week that the workers compensation marketplace is healthy and the outlook for future stability remains good, although the industry must be careful to avoid swings in the underwriting cycle.

The two spoke at the opening of NCCI's Annual Workers Compensation Issues Symposium in Orlando. In separate speeches, Kocher and Lannutti pointed to the current combined ratio of 103 percent as indication of the industry's health-particularly after a decade of poor results where the combined ratios hovered at or near 120 percent.

"It is truly gratifying to see how the workers compensation line has improved," Kocher says, "but it is also a time for caution especially with an eye toward erosion of the system. The business in the past has been cyclical, and there is little reason to think it will be otherwise in the future. "Accident year loss ratios trending higher, state systems under attack by those who would undermine reforms and the past cyclical nature of the business tell us that we must be on our guard. Now, more than ever, we should pledge to strengthen our focus on accident prevention, ensure the integrity of our Experience Rating Plan system, maintain loss cost adequacy, defend reforms gained and implement statutory reform where needed, and effectively manage the residual market."

Several market factors were credited with causing a turnaround in the workers compensation industry, including extensive state legislative reforms, rate relief, enhanced safety awareness and accident prevention measures, managed care initiatives and antifraud programs.

Workers compensation accounted for some $24 billion in insurance premiums during 1997-a 4 percent drop from the previous year. Overall, total written premium is down 22 percent since 1990 according to figures presented by Lannutti. Contributing factors to the drop in premium include the emergence of large deductible policies, the migration to self-insurance, new state funds, and recent rate decreases and increased competition. Looking to the future, five specific issues were identified as having the most significant potential to impact long-term favorable results:

Loss Trends: In recent years, loss trends have fallen off sharply, largely due to benefit reforms, managed care, fraud control, safety initiatives. However, as these cost containment efforts reach maximum market penetration, there may be a change in loss trends.
Reform Impact: While reform legislation has had a substantial positive impact, some laws have still not been fully tested, and other laws are encountering legal challenges in courts and legislatures.
Residual Market Changes: This market has encountered substantial changes, including rate adequacy improvements and massive depopulation. Such depopulation can drive up both the voluntary and residual market loss ratios.
Deductible Reserves: Large deductible policies will create challenges in terms of accurately estimating adequate reserves and expected results.
Managed Care: Broad public concerns with the managed care industry may impact workers comp. If public managed care programs encounter stiffer regulation, workers comp medical costs and trends may also be ultimately impacted.

"In spite of the potential for gathering storm clouds, the current snapshot of workers compensation is excellent for everyone-including workers, employers, regulators, legislators and insurers," Lannutti reported.

Both Lannutti and Kocher emphasized the positive outlook for the workers compensation marketplace, and while each noted the presence of market forces which might ultimately have a negative impact, both ultimately reported that the current and immediate outlook for the workers compensation industry remains 'cautious but good.'