Compsource official attributes losses to strength of private insurers

July 1, 2008
OKLAHOMA CITY – Terry McCullar seems unperturbed to report to the board yet another month of policy losses for CompSource Oklahoma. The state-created workers’ compensation insurer has been losing ground in its net number of policies at a steady clip since 2006.
But McCullar is familiar with the ups and downs of the workers’ compensation market in Oklahoma, and doesn’t seem to regret the loss in market share. McCullar notes the data suggests CompSource’s lost policies are an indication of the strength of the private insurance market at the moment. But the data also indicates that hard times for the market may be on the horizon, as private insurers increasingly become the victims of their own success.
“It’s starting to show up in combined ratios,” said McCullar. “They’re beginning to decline, which may be the first indication that the less competitive companies are pricing themselves out of the market.” An insurance company’s combined ratio is the sum of its loss ratio and expense ratio; a combined ratio over 100 generally indicates unprofitable underwriting.
“Softening prices are pushing written premium growth in workers’ compensation into negative territory, jeopardizing longer-term profitability,” Conning Research & Consulting reported in its midyear update. The average 3-percent decrease in written premiums experienced nationwide could in part be attributable to competitive pricing, as insurance companies fight for a greater share of the market. But when coupled with increasing medical costs and the threat of a sustained economic recession, low premiums could signal a profitability problem for the private market in the near future.
“Keeping the combined ratio at or below 100 percent will be both a test of insurers’ resolve in providing a stable market to the customer, and their ability to manage enterprise risk effectively,” Conning reported.
Private insurers may increasingly find themselves between a rock and a hard place as they balance the need to keep written premiums low with continued increases in medical costs. Workers’ comp reforms in several states have shown success in reducing the number of claims filed, but the cost of the average claim has grown enough to significantly erode the benefits of lowered frequency. And as the average age of the American worker continues to increase, insurers can expect to see greater severity in bodily injuries, Conning reported.
According to the latest NCCI report, frequency of claims per 100 workers has declined from 1.7 to 1.1 between 1997 and 2006, but the annual increase in medical care costs per claim averages 8.5 percent over the last five years. Medical care costs are growing faster than the overall Consumer Price Index medical care costs, NCCI reports, accounting for 59 percent of total claim costs in 2007.
Demand for insurance coverage declines during times of economic recession, as employers try to cut costs. At the same time, studies show more workers are likely to file claims during times of economic hardship. Employers may also cut spending on safety-related budget items, contributing to a rise in claims.
States that have in recent years made significant workers’ comp reforms may be unwilling to provide further benefits for insurers if it comes to light that some of their problems with profitability are “’self-inflicted’ by aggressive price cuts,” Conning reported.
The effect in Oklahoma may prove different for Oklahoma than for other states. The fact that premiums for CompSource have held relatively steady for the last few years despite a reduction in the number of policies may indicate that Oklahoma has bucked the nationwide trend in that wages have increased during that time, said McCullar.
The leading private insurer in Oklahoma, AIG, holds 15 percent of the market share. But AIG’s spokesman in New York remained tight-lipped about the company’s experience.
“We very rarely comment on claims experience,” said Joe Norton, director of public relations for AIG. “It’s not something I can help you with.”
Nationwide, the average combined ratio for private insurers rose from 93 in 2006 to 99 in 2007. CompSource reported a combined ratio of 111 for 2007, in range with other state-created insurers, which reported combined ratios between 106 and 115. CompSource was the leader in market share in Oklahoma during 2007, at 37.8 percent. During the last hard market cycle, in 2005, CompSource’s market share peaked at 46.9 percent.
Copyright © 2008 The Journal Record All Rights Reserved 101 N. Robinson Ave., Ste. 101, Oklahoma City, OK, 73102