Leaders of state funds across the country are keeping a close eye on pricing in their workers’ comp markets and the national weather maps as they prepare for the day when they again will have to shoulder a larger share of the market. Like California’s State Compensation Insurance Fund, participants in a recent A.M. Best panel discussion reported a steep drop-off in market share during the continuing soft insurance market but noted signs of a turnaround.
California’s State Fund continues to refuse to be rated by A.M. Best.
Just how fast the market will turn is still conjecture, but one determinant could be the upcoming hurricane season.
“I’m watching pricing, that is crucial, but I’m also watching industry capacity,” says Robert Dove, president and CEO at Hawaii Employers Mutual Insurance Company (HEMIC). He points out that the reinsurance and property and casualty industries are still flush with capital despite several large catastrophes during the first quarter of the year, such as the earthquake and tsunami in Japan and the rash of tornados across the U.S. “But a bad hurricane season could drag some of that capital out and cause more price firming,” Dove says.
California’s State Fund used to laugh at its Hawaii counterpart, saying it had policies bigger than the entire Hawaii fund.
In a discussion led by A.M. Best officials, the carriers of last resort in Hawaii, Montana and Louisiana compared their organizations to a rubber band—expanding and contracting to meet market share demands based on movements of private capital into and out of their markets. Capital has been flowing in for several years, but these state funds may soon test their elasticity.
Kristin Wall, president and CEO of Louisiana Workers’ Compensation Corporation, says the workers’ comp market in her state remains soft but appears on the verge of change, adding, “Louisiana was one of 14 states where the National Council on Compensation Insurance (NCCI) filed an increase, and some of the bigger [private carriers] said they would take 10% increases, so we do see a change in pricing.” Wall also notes that private carriers are allowing more of the higher-risk, residual-market-type business to return to the fund. “That’s sort of a bellwether of a changing market,” she noted.
These observations of a turn in pricing are supported by a recent survey from analysts at Towers Watson. Their most recent Commercial Lines Insurance Pricing Survey (CLIPS) shows that prices overall were flat in the first quarter for all commercial lines, but workers’ comp was the outlier, with an overall increase in price. Pricing increases in California have been occurring for a while, but on a national scale they had been outpaced by pricing decreases in other markets, Towers researchers note. No more. The CLIPS survey shows that aggregate workers’ comp prices outside the Golden State increased for the first time in six years. The Towers study is based on data submitted by 39 insurance companies representing about 20% of the commercial insurance market (excluding state funds).
Negative Outlook
As a whole, A.M. Best revised its outlook to negative for the workers’ comp industry earlier this year. Analyst Michelle Baurkot says the driving factors behind that move are continued competitive conditions and economic factors that keep prices down. She also notes that private carriers have been releasing reserves in recent years and that they likely are reaching the bottom of the barrel. “Expect a round of reserve strengthening,” she warns.
“These are combined ratios that we haven’t seen since the 1990s, and we’re in a more precarious position now with the economy.” —Laurence Hubbard, Montana State Fund
Baurkot also expressed concern about the rising combined ratio for the workers’ comp industry, expected to top 121 this year. It was 117 in 2010, she notes.
“These are combined ratios that we haven’t seen since the 1990s, and we’re in a more precarious position now with the economy,” says Laurence Hubbard, president and CEO at the Montana State Fund, noting that this is another in the industry’s cycle of reserve releases followed by strenthenings. “The question is: Are we good enough in our analytics to anticipate and survive, or will it be a return to the late 1990s with all the failures?”
For the Louisiana fund, Wall says its internal goal is to keep its combined ratio at 110 or below. “We can break even pretty easy on that, and are adding to surplus at the same time from investments,” she notes.
“Our philosophy is 100 should be the max, but in the real world that’s not always possible,” adds Hawaii’s Bob Dove. “We’re projecting a 104 combined this year and next. Those four points hurt but are necessary. We know that there will be peaks and valleys, but due to our sizeable surplus we can weather the times when we have to go over 100.”
California’s State Fund has been relying on a similar model of using investment income to offset a combined ratio that clocked in at 157 for 2010. In spite of underwriting losses nearing $650M and an extraordinarily high expense ratio, SCIF recorded net income of $171 million for the year, down some 34% from the previous year.
(Filed by Brad Cain in San Francisco)