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Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment

Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment. Workers Compensation Educational Conference Orlando, FL August 22, 2011 Download at www.iii.org/presentations. Robert P. Hartwig, Ph.D., CPCU, President & Economist

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Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment

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  1. Workers Compensation: Opportunities and Challenges in a Weak Exposure Environment Workers Compensation Educational Conference Orlando, FL August 22, 2011 Download at www.iii.org/presentations 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  bobh@iii.org  www.iii.org

  2. Workers Compensation Exposure Summary There Has Been Tremendous Erosion of Workers Comp Exposure Over the Past Several Years 3

  3. Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium $ Billions p Preliminary Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI 1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent Calendar Year

  4. Workers Comp Rate Changes,2008:Q4 – 2011:Q2 The Q2 2011 WC rate change was the first increase in many years (Percent Change) Source: Council of Insurance Agents and Brokers; Information Institute.

  5. Number of Workers Covered Under Workers’ Compensation Programs, 1989-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  6. Total Wages Covered Under Workers’ Compensation Programs, 1989-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  7. Private Industry Occupational Injuries and Illnesses, 1987-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  8. Number of Workers Covered by Workers’ Compensation, By State, 2008-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  9. Total Wages Covered by Workers’ Compensation, By State, 2008-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  10. Workers’ Compensation Benefits and Costs Per $100 of Covered Wages, 1980-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  11. Workers’ Compensation Medical and Cash Benefits Per $100 of Covered Wages, 1980-2009 Source: National Academy of Social Insurance. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  12. Labor Market Trends Massive Job Losses Sapped the Economy and WC Exposure; Trend Improved in Early 2011 but Is Now Weak 13

  13. Unemployment and Underemployment Rates: Stubbornly High in 2011 January 2000 through July 2011, Seasonally Adjusted (%) U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 16.1% in July 2011 Recession ended in November 2001 Unemployment kept rising for 19 more months Recession began in December 2007 Unemployment fell to 9.1% in June Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in November - December 1982 Jul 11 Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure Source: US Bureau of Labor Statistics; Insurance Information Institute. 14 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  14. Monthly Change in Private Employment January 2008 through July 2011* (Thousands) Private employers added jobs in every month in 2010 for a total of 1.435 million for the year 154,000 private sector jobs were created in July Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period Private Employers Added 2.368 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

  15. Change in Number Employedin Select Industries, June 2011 vs. June 2010 Thousands Professional Business Services, Health Care, and Trade, Transportation & Utilities) were the job growth leaders in the past year. There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  16. Monthly Change Employment* January 2008 through July 2011* (Thousands) The job gain and loss figures in 2010 were severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million nonfarm jobs were created. 117,000 nonfarm jobs were created in July Monthly Losses in Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 6.2 Million Through March 2011; 13.5 Million People are Now Defined as Unemployed *Estimate based on Reuters poll of economists. Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute 17 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  17. Unemployment Rates by State, June 2011:Highest 25 States* In June, 28 states and the District of Columbia reported over-the-month unemployment rate increases, 8 had decreases, and 14 had no change. The unemployment rate in the US was 9.2% in June *Provisional figures for June 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

  18. Unemployment Rates By State, June 2011: Lowest 25 States* In June, 28 states and the District of Columbia reported over-the-month unemployment rate increases, 8 had decreases, and 14 had no change. *Provisional figures for June 2011, seasonally adjusted. Sources: US Bureau of Labor Statistics; Insurance Information Institute.

  19. Labor Underutilization: Broader than Just Unemployment % of Labor Force Marginally Attached and Unemployed Persons Account for 16.1% of the Labor Force in July 2011 (1 Out Every 6.2 People). Unemployment Rate Alone was 9.2%. Underutilization Shows a Broader Impact on WC and Other Commercial Exposures NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute. 20 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  20. US Unemployment Rate Jobless figures have been revised upwards for 2011/12 2007:Q1 to 2012:Q4F* Rising unemployment eroded payrolls and workers comp’s exposure base. Unemployment peaked at 10% in late 2009. Unemployment forecasts remain stubbornly high through 2011, but still imply millions of new jobs will created. * = actual; = forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/11); Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

  21. Workers Compensation and the Economy Workers Comp Exposure and Performance is Intimately Linked to the Economy and Labor Market 22

  22. US Real GDP Growth* The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8% 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 2011 got off to a sluggish start, but growth is expected to accelerate in the remainder of the year. This is a major positive for insurance demand and exposure growth. Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly * Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 8/11; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  23. Length of US Business Cycles,1929–Present* Length of Expansions Greatly Exceeds Contractions The “Great Recession” lasted 19 months, longest since Great Depression Duration (Months) Average Duration** Recession = 10.4 Mos Expansion = 60.5 Mos *Through July 2011. 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. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  24. 2011 Financial Overview State Economic Growth Varied in 2010 Hard hit Midwest and Northeast states finally entering recovery in 2010 Texas had one of the stronger economies in 2010 and has generally outperformed during the economic downturn eSlide – P6466 – The Financial Crisis and the Future of the P/C

  25. Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 Top 25 States North Dakota is the growth juggernaut of the P/C insurance industry—too bad nobody lives there… Sources: SNL Financial LC.; Insurance Information Institute.

  26. Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010 Bottom 25 States US Direct Premiums Written declined by 1.6% between 2005 and 2010 States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years Sources: SNL Financial LC; Insurance Information Institute.

  27. Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums Payroll Base* WC NWP $Billions $Billions 12/07-6/09 7/90-3/91 3/01-11/01 WC premium volume dropped two years before the recession began WC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005 29% of NPW has been eroded away by the soft market and weak economy *Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  28. Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010* Top 25 States 5,807.1 Only 7 (small) states showed growth in workers comp premium volume between 2005 and 2010 *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: SNL Financial LC.; Insurance Information Institute.

  29. Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010* Bottom 25 States Workers Comp DPW plunged 28.7% from between 2005 and 2010 States with the poorest performing economies also produced the most negative net change in premiums of the past 5 years *Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period. Sources: SNL Financial LC.; Insurance Information Institute.

  30. Crisis-Driven Exposure Drivers in Workers Comp Economic Obstacles and Opportunities to Growth 34

  31. New Private Housing Starts, 1990-2016F New home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959 (Millions of Units) The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growth Job growth, improved credit market conditions and demographics will eventually boost home construction Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 7/11); Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  32. Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures Percent of Industrial Capacity “Full Capacity” The US operated at 76.7% of industrial capacity in Jun. 2011, above the June 2009 low of 68.3% Hurricane Katrina The closer the economy is to operating at “full capacity,” the greater the inflationary pressure March 2001-November 2001 recession December 2007-June 2009 Recession 37 Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm.

  33. Business Bankruptcy Filings,1980-2011:Q1 % Change Surrounding Recessions 1980-82 58.6% 1980-87 88.7% 1990-91 10.3% 2000-01 13.0% 2006-09 208.9%* 2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40% from 2008 and the most since 1993. 2011:Q1 filings are down 14.4% from 2010:Q1. Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute 39 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  34. Private Sector Business Starts, 1993:Q2 – 2010:Q3* Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:Q3 526,000 (Thousands) 344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for new business starts since 1993. Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure * Data through September 30, 2010 are the latest available as of July 25, 2011; Seasonally adjusted Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. 40 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  35. 11 Industries for the Next 10 Years: Insurance Solutions Needed Health Care Health Sciences Energy (Traditional) Many industries are poised for growth, but many insurers do not write in these economic segments Alternative Energy Agriculture/Agribusiness Natural Resources Environmental Technology (incl. Biotechnology) Light Manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking) eSlide – P6466 – The Financial Crisis and the Future of the P/C

  36. Percentage Change in Employment in Select Industries, June 2011 vs. June 2010 Percentage Change Mining and Logging activities were the job growth leaders over the past year, in percentage terms There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  37. Change in Number Employedin Select Industries, June 2011 vs. June 2010 Thousands Professional Business Services, Health Care, and Trade, Transportation & Utilities) were the job growth leaders in the past year. There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  38. Percentage Change in Employment in Select Sub-Industries, June 2011 vs. June 2010 % Change Oil and Gas Extraction was among the fastest growing industry sub-segments over the past year, in % terms There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  39. Change in Number Employed in Select Sub-Industries, June 2011 vs. June 2010 Thousands Industries related to natural resource extraction, processing and manufacturing are doing well, along with health care There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  40. Where Will the Growth in WC Exposure Come From? Industry and Occupation Growth Analysis 46

  41. Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

  42. Numeric Change in Wage and Salary Employment in Service-Providing Industries: 2008-2018P (Thousands) Health, Science and Education will be important sources of exposure growth for WC insurers this decade Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute eSlide – P6466 – The Financial Crisis and the Future of the P/C

  43. Insurance Information Institute Online: www.iii.org Thank you for your timeand your attention! Twitter: twitter.com/bob_hartwig

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