2017 NCCI Report

Last year, PRI highlighted reports of the National Council of Compensation Insurance (NCCI) as to the profit performance of workers’ compensation insurance in 2015-16.  NCCI files rates in 38 states for workers’ compensation insurance companies and insurers either follow those rates or, in most cases, quote lower rates to employers for the required coverage.

 The most recent NCCI reports indicate that profitability for insurance carriers continues to grow.  In 2017, workers’ compensation insurance realized 23.3% “pretax” gain with the lowest loss ratio (88%) since the 1950s.  This compares with the “average pretax” gain (underwriting profit plus investment profit) of 6.9% for all years since 1997. (see NCCI charts directly below)

 The WC pretax operating gain measures the overall financial performance of the WC business, reflecting both underwriting and investment income. The 2017 investment gain of 12.6% in combination with the favorable 2017 combined ratio resulted in a WC operating gain of 23.3% for that year. This exceeds the 6.9% long-term average pretax operating gain since 1997. This value, which is based on updated data reported by the industry, is slightly more than the preliminary estimate of 23% shared at AIS 2018.

While workers’ compensation insurance rates have dropped 30% since 2002, the profitability accruing to insurance carriers in the 2015-18 period is nothing short of truly remarkable and suggests that ‒ even though NCCI filed rates are dropping ‒ they are still grossly inflated.  It is safe to say that most of this profit ‒ indeed perhaps all of it ‒ is not being shared with employers.  Otherwise, carriers could not make such extraordinary profits on the reduced NCCI rates.  Employers may be seeing reduced rates but they are not seeing their ratable share of these extraordinary profits.

According to NCCI, the average loss ratio is 88% which means that there is a 12% “underwriting” profit on each dollar of premium.  This is a level of profit not seen since the 1950s.

The WC investment gain on insurance transactions (IGIT) measures investment performance by comparing investment income allocated to the WC line of business with the corresponding earned premium. At AIS 2018, the IGIT for Calendar Year 2017 was estimated to be approximately 12% of net earned premium. The updated data reported by the industry indicates a slightly higher ratio of 12.6%—the highest result since 2013 and an improvement from the 2016 local minimum of 10.8%. This latest gain is slightly below the 13.2% long-term average since 1997.

The WC investment gain on insurance transactions (IGIT) measures investment performance by comparing investment income allocated to the WC line of business with the corresponding earned premium. At AIS 2018, the IGIT for Calendar Year 2017 was estimated to be approximately 12% of net earned premium. The updated data reported by the industry indicates a slightly higher ratio of 12.6%—the highest result since 2013 and an improvement from the 2016 local minimum of 10.8%. This latest gain is slightly below the 13.2% long-term average since 1997.

The latest data from the National Council of Compensation Insurers (NCCI) is remarkable.  NCCI files suggested workers’ compensation rates in 38 states and, in the most recent filings, state regulators have decreased premiums in 36 of the 38 states.  Moreover, NCCI data reveals increased profitability in 2015 and 2016 in that loss and loss adjustment ratio are approximately 94% with one company contributing 4% to that total which means that most companies are at the 90% level.  NCCI State of the Line Guide, p.4 (May 2017); NCCI Chief Actuary Kathy Antonello, quoted by Greg Jones in “NCCI President Says Comp Needs to Adapt to Stay Relevant”, WorkCompCentral, May 19, 2017.  This means that underwriting profit is 10% for most companies and this does not include profit from investment income.  Compare this underwriting profit to the underwriting loss for personal automobile insurers where the loss ratio was 105% in 2015 and 106% in 2016.  NCCI State of the Line Guide, p.4.

In addition, according to the National Association of Insurance Commissioners (NAIC), the Property and Causality insurance industry (which includes workers’ compensation) had an investment gain of 11% in 2016.  See NAIC data in NCCI State of the Line Guide, p.6.  This means that most workers’ compensation insurers had a 21% profit in 2016 (10% underwriting plus 11% investment).

California, which is not an NCCI state, just advised workers’ compensation insurers to reduce their rates by 16.5%.  California Department of Insurance Press Release, May 22, 2017.

NCCI states that this 2 year period (2015-16) is the most favorable 2 year period for workers’ compensation insurers since 1975. 

Why have these extraordinary results (lower premiums and higher profits) occurred?  The reasons depend on one’s perspective.  As quoted by Greg Jones in “NCCI Symposium – Fate of the Work Comp Industry Summary” in WorkCompCentral, May 22, 2017, the Senior Actuary for NCCI, Barry Lipton, says that the reason is the increased use of “network providers” and not new fee schedules.  Others (Joseph Paduda weblog, April 19, 2016) have suggested that injured workers may use the Affordable Care Act (ACA or Obamacare) instead of claiming workers’ compensation benefits.  According to Paduda, “Monday morning” injuries would be reduced since ACA policies will cover those injured over the weekend when not actually working.  That explanation seems very unlikely given the high deductible provisions of ACA policies and the fact that most workers would never qualify for the non-deductible world of ACA Medicaid coverage.

Groups like ProPublica and National Public Radio (NPR) say that the reason is the numerous legislative changes to take away worker benefits to the benefit of workers’ compensation insurers.  See “INSULT TO INJURY”, “The Demolition of Workers’ Comp”, www.propublica.org, March 4, 2015.  ProPublica and NPR produced a series demonstrating the steady and continuing erosion of workers’ benefits.

The U.S. Department of Labor issued a 43 page report on October 5, 2016 which confirmed the ProPublica / NPR reports and concluded that states have decreased benefits and created hurdles to medical care and shifted costs to public programs such as Social Security Disability Insurance.

The Workers’ Compensation System was created as a result of a “grand bargain” between employers and their employees.  Employees would give up their right to sue employers for improper working conditions in exchange for a “no-fault “compensation system.  However, the current fairness of that “bargain” has been questioned by the ProPublica / NPR series as well as the U.S. Department of Labor.  Recently, an Alabama Circuit Court declared the Alabama wage replacement portion of that state’s system unconstitutional as the wage has not been increased in 30 years by the legislature.  Thirty years ago the $220 weekly wage could keep a family of 4 above the poverty level.  The amount would have to be doubled to have the same effect today and, yet, has never changed or been indexed for inflation.  The Court stayed its ruling to allow the legislature to remedy the problem.  Greg Jones in WorkCompCentral, May 19, 2017

It certainly seems that the pendulum has swung too far toward insurers and away from injured workers and that legislators need to address this imbalance.