The workers’ comp industry hasn’t had a profitable underwriting year since 2006, according to Conning Research & Consulting. And while the economic recovery and rate increases will boost premiums, Conning expects—just as in recent years—rising medical costs and the increased utilization of drugs to re-introduce the threat of inflation in loss costs and reduce profitability even further.
The firm’s recent report, “Workers’ Compensation: A Bumpy Road from Recession to Recovery,” indicates that the line has been affected by falling investment yields, creating headwinds against overall profitability. “Still, some early signs of a turn in key economic drivers may be appearing, and the effects of recovery may bring some new surprises in risks and opportunities in the line,” said Joshua Youdovin, analyst at Conning Research & Consulting.
Insurers will need to adapt to changes associated with higher inflation, including medical inflation. From 2004 to 2011, medical costs climbed steadily by 5 to 7 percent each year, the report states. The current forecast for this growth rate is a decrease of 4 to 5 percent per year. However, economic factors such as wage inflation, an increase in Treasury yields and a decrease in stock market returns can push medical inflation upward. Even without external economic factors, medical costs still can increase more than expected due to the uncertainty regarding the health care community.
Conning contends that future profitability will depend on how well insurers can adapt to these changes and manage both the assets and liabilities on their balance sheets.
Other challenges will vary by state and industry focus, said Stephan Christiansen, director of research at Conning. “Cooperation with people in the medical community, the injured workers, and employers is essential for controlling the rising tide of loss costs. Companies will compete in different ways, and at different rates of response to these changes. State governments and insurance departments also will need to lead the way, using lessons learned from successful state reforms in the past as the workers’ compensation industry resets for the future.”
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