Hard Workers Comp Markets – Two of the Reasons Not Discussed That Often
The hard workers comp markets usually occur when the suppliers (carriers) cut the supply of insurance to (demand) employers. I have heard investment returns often discussed in many of the reinsurance webinars and articles – not so much in the workers comp insurance discussions.
Those two areas are:
- Investment returns
- The stacked random variable introduction this year
Investment Returns Influence on Hard Workers Comp Markets
Investment returns remain one of the drivers of the insurance markets. The investment returns that carriers experience influences the rates they charge their insureds.
Insurance carriers heavily prefer solid non-volatile investments such as deposit interest rates. Even though the stock markets have recovered much of their losses the volatility remains extreme.
The nations’ largest rating bureau NCCI – published a .83 combined ratio last year. In a very roundabout way, this means the carriers are receiving a 17% return on premiums written. That percentage indicates the market is healthy with much competition. A soft market would likely be the result of such dramatic numbers.
Stock Market Volatility and Extremely Low Interest Rates
If one reads any of their mutual funds’ prospectus, many times right on the front page the mutual fund says – there is a chance of loss.
Even though carriers had a 17% return on premium, the wild swings in the stock markets make most carriers very uneasy. Carriers have that same chance of loss as an individual investor. The 17% return can be lost in a few days.
Insurance carriers prefer interest-bearing investments including bonds. I just read the NC State Employees Credit Union investment returns on IRAs. IRAs are considered permanent investments – the money stays there. The rate of return was 0.76% (Wow!).
The safety of interest-bearing investment is offset by the minuscule rates of return. Bond markets do not look that great either.
How do insurance carriers remove this volatility – by not underwriting all markets or class codes. They can remove risk on the “other end” of their financial books. Many insurance industry experts have almost unanimously said the markets are “tightening.”
The tightening could be temporary. Workers Comp carriers move very slowly back into a market or class code where they have pared back underwriting certain companies.
New Random Number Variable – Heavy Effect on Workers Comp Hard Markets
I have attempted to not write articles on COVID-19 lately. So many writers publish those articles every week. The COVID-19 caused a random-number-variable stacking.
Presumptions and Claims Handling
As of today, 17 states have passed COVID-19 presumption laws that make actuaries, underwriters, and claims handlers very uneasy.
Many claims experts including myself have voiced their opinions of the need for presumption laws. I wrote an article on that subject a few weeks ago. Check it out. The Workers Comp Occupational disease statutes have presumptions built into them.
Regardless, they are law now and must be followed. The COVID-19 is a stack-risk.
COVID-19 introduces three random number variables to the risk equation:
- COVID-19 increases the risk of an on-the-job occupational disease
- The presumption laws may change the claim handling procedures for the investigation of COVID-19 claims.
- Our changing relationships with China – this is a subject for a later article.
When you have actuaries, claims handlers, and especially underwriters nervous, the best way to remove some of the nervousness is by not underwriting every company that submits a workers comp app like the old days.
The nervousness results in hard workers comp markets.
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