It has been said that the insurance industry lingers too long in either a state of euphoria or denial. When times are good, executives and observers are quick to be enthusiastic and optimistic. When times are bad, warning signs sometimes go ignored as industry players refuse to accept the worsening conditions around them.
Over the past year or so, we have often discussed the state of long-tail casualty classes as a concern. The focus has been mainly on “other liability” and workers’ compensation reserves. Our analysis has continued to highlight the likelihood of these proving deficient. However, with the insurance industry continuing to release reserves from workers’ compensation, it appears that we may be in the “denial” phase.
Not getting enough attention are comments made by ProAssurance, a medical malpractice and workers’ comp specialist. Since late 2022, the company has been warning about changing trends influencing its pricing, reserving and rate action decisions.
On an investor call yesterday, ProAssurance CEO Ned Rand warned that the workers’ comp market is still experiencing higher medical costs per claim.
"Despite continued moderation of claim frequency, the average medical cost per claim is still rising due to healthcare wage inflation, higher utilization and rising costs as new treatments and technologies are applied to patient care," Rand said.
Note that in the average workers’ comp claim, approximately 35% of the cost comes from lost time and the rest from medical expenses. So, even though an increase in wages has a commensurate impact on premiums, it also has an offsetting impact on loss cost trends.
This trend is visible in the graph below on the left side, where these medical-related items continue to worsen. The graph on the right side shows general wage inflation. While the medical wage inflation drives loss cost, this overall increase will impact top-line growth as payrolls increase. This worsening of trends is not being fully reflected as the reported results in workers’ comp remain strong.
On the other hand, medmal trends are also reflecting worsening severity, as shown below. This data is for medical malpractice specifically, but it's indicative of the runaway jury award trend of recent years that has affected the industry as a whole.
This suggests that the industry may be in a denial phase as severity items continue to jump, while simultaneously remaining in the euphoria phase as frequency trends remain low. Additionally, we would note that the post-Covid backlog will likely clear out by year-end, so even this trend line could continue to move adversely.
The table below shows industry combined ratios for general liability, workers’ comp and medical malpractice over time. For reference, medmal makes up 4% of industry reserves, workers’ comp is 16% and general liability is 32%.
Although ProAssurance’s books of business within the segments of medmal and workers’ comp differ from the wider industry, what is interesting is the shift in trends. The industry’s workers’ comp results have only modestly worsened over 2022, while ProAssurance’s reversal over time is much more asymmetric.
Taking a step back, either ProAssurance or the industry is not on top of loss trends. If the answer is somewhere in the middle, industry exuberance on workers’ comp could prove short-lived if social inflation’s impact on jury awards continues to worsen.
In summary, we believe ProAssurance’s commentary and results serve as a reminder of the worsening social and loss cost inflation environment. They also remind of us of the very real possibility of trends reversing in workers’ comp, while general liability trends could worsen from here.