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By Alicia Miller, CPA, Assistant Controller, Pinnacol Assurance

There are a number of challenges facing the workers’ compensation industry today and it is no surprise that state funds are not immune to these economic realities. From rising medical costs to political uncertainty, the industry is acutely aware of potential impacts. Thus, companies are striving to measure their performance and stability in the marketplace.  In the face of these challenges, benchmarking continues to be a hot topic and is used to help companies gauge where they are and set a direction for the future. In this quest, there are numerous resources available to leverage relevant industry data.

Challenges in the current environment

NCCI reported in the 2013 Workers’ Compensation Issues Report that the results for 2011 showed that workers’ compensation had the highest calendar year combined ratio over all major commercial lines for the third straight year in a row. Factors potentially impacting this are rising medical costs, claim frequency not yet returning to historic rates of decline, and residual market growth.

There is indication that the market is hardening with the increase in rates the industry is experiencing.  For state funds operating on a competitive level, this means loss of market share is a real concern. While economic recovery remains positive but slow, the market is still experiencing a low interest rate environment.

Market leaders are also closely watching and considering the outcome of the Patient Protection and Affordable Care Act (PPACA) and the federally backed terrorism insurance set to expire in 2014.

Whether state funds operate exclusively or on a competitive level, they have some exposure to these economic conditions. 

Considerations of benchmarking

Benchmarking against a peer group is often a company’s first step in considering challenges and identifying improvements. Benchmarking allows a company to obtain an understanding of where results fall short of or exceed others and set a standard for improvement.  Whether a state fund operates exclusively or on a competitive level can dictate the relevant peer group and points of measurement. 

Familiarizing your company with fellow AASCIF members’ operations can be beneficial to identifying similar organizations to compare yourself against as workers’ compensation providers come in all shapes and sizes. On the other hand, some state funds may be interested to compare themselves against their competitors in a particular market, such as their region.

To maximize benchmarking, it is important to determine the measurement area that is requested or relevant to the company. Defining the area, such as investment returns or average claim costs, will aid in determining what source of information will be most effective for benchmarking. Some of the more common workers’ compensation insurance benchmarks are injured worker satisfaction, combined ratio, retention rates, disposal rates, indemnity claim counts, new claim counts and average premium rate. Keep in mind, the most effective benchmarking exercises measure critical strategic outcomes and drive behavior and results.

Benchmarking resources and tools

AM Best – AM Best is a full-service credit rating organization dedicated to serving the insurance industry.  Information on companies that have sought an AM Best rating is available on the website. By simply creating an account, a user may obtain some summary information and for a fee, request a single company’s profile or multiple company profiles and comparisons.  There are at least eight state funds that have obtained an AM Best rating and regularly file information.

NAIC – The National Association of Insurance Commissioners provides a centralized repository for insurance company Annual Statements on its website for its members.  In addition, for a nominal price a number of statistical reports may be purchased. These may include a variety of reports, such as Statistical Compilation of Annual Statement Information and Invested Assets Reports.

Business Partners – A company’s business partners are often privy to industry information and may even have conducted studies or done benchmarking for other clients. Investment advisors often have resources and knowledge of industry data that they are willing to share or have already shared with the board of directors or other committees.  A third party actuary, if already engaged, will also have access to industry data and may provide comparative information.  Many potential partners may even share industry data or studies in order to create new relationships; it doesn’t hurt to ask.

Market Surveys – Many insurance companies are solicited to take part in industry surveys.  One useful study conducted by the Ward Group is a survey that gathers finance and related operations data for property and casualty companies.  Ward provides participants with comparative benchmarks with information from ownership structure to closing cycle information to average personnel costs. 

Trade Associations – There are many industry associations that go to great lengths to gather information and publish data that is useful to their members. To name a couple, the Insurance Accounting & Systems Association (IASA) facilitates the exchange of educational information among insurance-related professionals, and the Property Casualty Insurers Association of America (PCI) provides its members with targeted industry information. IASA shares a monthly publication with members via its Industry Pulse Polls and members may also conduct their own informal polls by submitting questions. PCI offers statistical and financial data via its subsidiary, Independent Statistical Service, Inc., quarterly or annually with information such as loss experience, and also offers a wide variety of studies through its website.

AASCIF Surveys – For those state funds looking to conduct their own surveys, AASCIF maintains an online directory by state and some committees maintain networking contact lists. Members often reach out to fellow members to gather specific information or conduct surveys. This method is often advantageous in obtaining relevant information from a known and familiar peer group.

AASCIF Stat Book – The Stat Book is an analytical tool that provides valuable comparative benchmarking results among AASCIF members that participate.  It is maintained by the Audit & Statistics Committee on the AASCIF website and is updated annually.  Updates for the current fiscal year ending will be accomplished in the near future. The Stat Book provides specific financial information as well as other operational measures for each participant. It is an extremely valuable tool as AASCIF members have this benchmarking tool at their fingertips and it may eliminate the need for other resources. We hope you avail yourself of the AASCIF Stat Book. 

Whether on a mission to gather new information or leverage industry benchmarking, industry data is obtainable and there is a plethora of resources. As AASCIF members, we all have an opportunity to share information and help fellow members and peers identify issues and opportunities in the current workers’ compensation market. Please encourage your company to participate in this year’s request for information for the Stat Book which will be posted as soon as 2012 information is available.