After the Crisis: Workers Compensation Overview and Outlook for 2011 & Beyond Business Insurance Virtual Workers Compensation Conference Keynote Presentation December 16, 2011 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected]
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After the Crisis: Workers Compensation Overview and Outlook for 2011 & Beyond
After the Crisis: Workers Compensation Overview and Outlook for 2011 & Beyond. Business Insurance Virtual Workers Compensation Conference Keynote Presentation December 16, 2011. Robert P. Hartwig, Ph.D., CPCU, President & Economist - PowerPoint PPT Presentation
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After the Crisis:Workers Compensation Overview and Outlook for 2011 & Beyond
Business Insurance Virtual Workers Compensation Conference
Keynote Presentation
December 16, 2011Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org
2
Presentation Outline
Workers Compensation and the Economy Regional Differences in Recession and Recovery Labor Markets: Overview & Outlook Payroll/Employment Exposure Trends
Workers Compensation Operating Environment Premium & Rate Trends Profitability Underwriting Performance Medical & Indemnity Claim Cost Trends Residual Market and State Fund Market Share and Performance Investment Market Impacts
P/C Insurance Industry Overview The Global Economic Storm: Financial Crisis & Recession
Workers Comp Exposure and Performance is Intimately Linked to
the Economy and Labor Market
4
US Real GDP Growth*
* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/10; Insurance Information Institute.
2.7
%
0.9
%
3.2
%
2.3
%
2.9
%
-0.7
%
0.6
%
-4.0
%
-6.8
% -4.9
%
-0.7
%
1.6
%
5.0
%
3.7
%
1.7
%
2.0
%
2.3
%
2.5
%
2.7
%
3.0
%
3.2
%
4.1
%
1.1
%
1.8
%
2.5
% 3.6
%
3.1
%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2
00
0
2
00
1
2
00
2
2
00
3
2
00
4
2
00
5
2
00
6
07
:1Q
07
:2Q
07
:3Q
07
:4Q
08
:1Q
08
:2Q
08
:3Q
08
:4Q
09
:1Q
09
:2Q
09
:3Q
09
:4Q
10
:1Q
10
:2Q
10
:3Q
10
:4Q
11
:1Q
11
:2Q
11
:3Q
11
:4Q
Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will
Compound and Gradually Benefit the Economy Broadly
Real GDP Growth (%)
Recession began in Dec. 2007. Economic toll of credit
crunch, housing slump, labor market contraction has
been severe but modest recovery is underway
The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%
Economic growth up sharply in late 2009 with rebuilding
of inventories and stimulus. More moderate growth
expected in 2010/11 but no “double dip”
5
Length of US Business Cycles,1929–Present*
10 1116
6
168 8
19
50
80
3745
39
24
106
36
58
12
92
120
73
17
43
138 11 10 8
0
10
20
30
40
50
60
70
80
90
100
110
120
Aug1929
May1937
Feb1945
Nov1948
Jul1953
Aug1957
Apr1960
Dec1969
Nov1973
Jan1980
Jul1981
Jul1990
Mar2001
Dec2007
Month Recession Started
Contraction Expansion Following
*Through Nov. 2010. Most recent recession began Dec. 2007 and ended June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.
Average Duration**Recession = 10.4 MosExpansion = 60.5 Mos
Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums
* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books
Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums; Nearly 29% of NPW Has Been Eroded Away by the Soft Market and Weak Economy
Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)
*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).
-4.4%
-2.0%-1.1%
1.1%
3.7%4.6%
8.5%
3.5%
2.1%
-0.5%
-3.6%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 2007-2009
Recessions in the 1970s and 1980s saw smaller exposure impacts
because of continued wage inflation, a factor not present
during the 2007-2009 recession
The Dec. 2007 to mid-2009 recession
caused the largest impact on WC
exposure in 60 years
(Percent Change)
(All Post WWII Recessions)
Recession Dates (Beginning/Ending Years)
2-Year Change in Countrywide NWP -23%
Known Pricing Impacts
Change in Bureau Rates and Loss Costs -7%
Change in Carrier Pricing -4%
Economic Impacts
Change in Total Payroll -4%
Impact of Recession on Industry Group Mix -4% to -6%
Impact of Recession by Firm Size -4% to -6%
Other Impacts +1% to -2%
Contributions to WCNet Written Premium DeclineCalendar Years 2007–2009
Source: NCCI
9
Total Wages, California2001-2009
$619.15 $614.54$630.69
$667.52
$703.99
$749.50
$790.44 $797.79
$753.97
$518
.60
$508
.16
$521
.08
$555
.40
$588
.32
$627
.54
$659
.99
$661
.15
$618
.17
$400
$450
$500
$550
$600
$650
$700
$750
$800
$850
2001 2002 2003 2004 2005 2006 2007 2008 2009p
All Employers Private Employers
Source: http://data.bls.gov
Recessions Cause Payrolls to Shrink. The 2001 Recession Saw a 2.0% Decline in Private Wages; the 2008-09 Dropoff was 6.3%.
Billions
Private sector wages fallen sharply in hard hit states like
Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization
Cumulative1990–1993
+36.3%
Cumulative 2000–2003
+17.1%
Cumulative 2004–2010
-26.7%
Cumulative 1994–1999
-27.8%
*States approved through 4/23/10.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.
35
Comparison of State WC rates
Source: Oregon Workers’ Compensation Premium Rate Ranking 2008. Rates weighted by Oregon’s distribution of exposures by classification
WC rates, on average, do not appear to be significantly higher or lower in states with workers comp state funds
Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis
WC Loss and LAE Reserve Deficiency: Private Carriers
Calendar Year Reserve Deficiency Increased in 2009
38
Return on Net Worth for Workers Comp: NC vs. US and NC All P-C Lines,1999-2008
2009p: Preliminary based on data valued as of 12/31/20091991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Claim frequency fell in 4.0% in 2009, in part due to the recession
Cumulative Change of -54.7%
(1991 – 2008)
2009p: Preliminary based on data valued as of 12/31/2009; *Frequency is defined as the number of lost-time claims per 100,000 workers.1991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies
49
Frequency: 1926–2008A Long-Term Drift Downward
Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research
Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers
2009p: Preliminary based on data valued as of 12/31/20091991–2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Accident Year
+4.5
Workers Comp Indemnity Claim Costs Continue to Grow
+5.8
4.2%
5.2%5.6%
4.7%
6.3%
2.3%
1.1%
2.7%
1.7%
4.7% 4.6%
2.3%
5.9%
7.7%
9.0%
10.1%
4.1%
1.7%
3.1%
5.0% 5.0%5.8%
4.5%
-1.0%
3.5%
3.6%
1.7%
10.1%
9.2%
3.1%
-2%
0%
2%
4%
6%
8%
10%
12%
1995 1997 1999 2001 2003 2005 2007 2009p
Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim
WC Indemnity Severity vs. Wage Inflation
2009p: Preliminary based on data valued as of 12/31/2009; 1991-2008: Based on data through 12/31/2008, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI
WC indemnity severity is once again outpacing
wage inflation
55
Dollar Change* in Average Hourly Earnings, June 2006 – August 2010
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30Ju
n 06
Jan
07
Jul 0
7
Jan
08
Jul 0
8
Jan
09
Jul 0
9
Jan
10
Jul 1
0
*3-month net change, seasonally adjustedSource: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
Average Hourly Earnings Grew at Least $0.05in Every 3-Month Period Since June 2006.
Construction laborers 255.9 20 28,520 Moderate-term on-the-job training
Elementary school teachers, except special education
244.2 16 49,330 Bachelor's degree
Truck drivers, heavy and tractor-trailer
232.9 13 37,270 Short-term on-the-job training
Landscaping and groundskeeping workers
217.1 18 23,150 Short-term on-the-job training
Bookkeeping, accounting, and auditing clerks
212.4 10 32,510 Moderate-term on-the-job training
Executive secretaries and administrative assistants
204.4 13 40,030 Work experience in a related occupation
Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience
Computer software engineers, applications
175.1 34 85,430 Bachelor's degree
Receptionists and information clerks
172.9 15 24,550 Short-term on-the-job training
Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook
Investment Performance
61
Investments Are a PrincipleSource of Declining Profitability
Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11
$35.4
$42.8$47.2
$52.3
$44.4
$36.0
$45.3$48.9
$59.4$55.7
$64.0
$31.7
$39.0
$25.8
$58.0
$51.9$56.9
$0
$10
$20
$30
$40
$50
$60
$70
94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and
Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income
Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.
($ Billions) 2009:H1 gain was $12.5B
Investment gains in 2010 are on track to be their best since 2007
64
Treasury Yield Curves: Pre-Crisis (July 2007) vs. October 2010
* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute
P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized
capital gains vs. -$11.1B in previous realized capital losses
68
ROE: P/C vs. All Industries1987–2009*
* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.
A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At Now
Combined Ratio / ROE
* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.
97.5
100.6 100.1 100.7
92.6
99.5 100.1101.0
7.5%7.3%
9.6%
15.9%
14.3%
12.7%
4.4%
8.9%
80
85
90
95
100
105
110
1978 1979 2003 2005 2006 2008* 2009* 2010:H1*0%
3%
6%
9%
12%
15%
18%
Combined Ratio ROE*
Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs
A combined ratio of about 100 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979
71
The Economic Storm
What the Lasting Effects of the Financial Crisis and Recession
Mean for the Industry’s Exposure Base, Growth and Profitability
*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business
88
Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*
* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute
3.3%
9.6%
6.9%
10.9%
6.2%
13.8%
16.2%
0%
3%
6%
9%
12%
15%
18%
6/30/1989Hurricane
Hugo
6/30/1992HurricaneAndrew
12/31/93NorthridgeEarthquake
6/30/01 Sept.11 Attacks
6/30/04Florida
Hurricanes
6/30/05Hurricane
Katrina
FinancialCrisis as of3/31/09**
The Financial Crisis at its Peak Ranks as the Largest
“Capital Event” Overthe Past 20+ Years
(Percent)
89
* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute
Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*