By Fritz Yohn
A shorter version of the following article appeared in National Underwriter, Property & Casualty Edition, April 6, 1998.
The alternating cold (mostly) and warm rate fronts (a few) and the storms of state regulation always have been prominent on the Doppler radar screens of workers comp writers.
In today's turbulent and complex business climate, however, rates and regulations provide only a limited perspective on developments forming just over the horizon. Taking these short-term indicators in isolation is like watching the Weather Channel for tomorrow's local forecast and ignoring the El Niño report.
In this month's column - the first of six that will appear in National Underwriter during the year - we focus on the El Niño of demand for business insurance, and look at implications for the workers' comp market.
In general, despite the U.S. economy's continued robustness, growth in the workers comp market will continue to be restrained over the next few years. Among the factors contributing to this outlook are:
Slow wage growth - Relative to the 1980s, the 1990s have experienced exceptionally slow wage growth despite the longest peacetime recovery on record. Total U.S. payroll is forecast to rise over the next few years at only about half the rate of the 1980s.
Restructuring of US Economy - The economy's continued shift away from goods producing and toward service-related industries also has worked to depress the workers comp market. In essence, this is because most goods producing jobs have significantly higher comp rates than do typical services jobs (due to higher risks of injury).
At present, goods producing industries account for only about 30% of total private industry payroll - a precipitous decline from their 60 % share in the 1960s and 70s. Despite this decline, current MarketStance estimates indicate that goods producing industries still account for slightly more than 40% of all workers compensation written premiums.
Meanwhile, there are a number of expected opportunities to be considered in workers' comp, such as:
Higher growth job classes - Payroll growth in service-related industries is forecast to just about double the pace of the goods-producing sector over the next few years - creating important growth opportunities for quick-witted carriers.
This does not mean that all service business classes are created equal, however. Payroll growth prospects will continue to vary substantially between industries and job classes within the service-related sector as a whole.
For example, the Finance, Insurance and Real Estate industries are forecast to have only modest payroll growth over the next three years, due in large part to on-going restructuring and consolidation.
In addition, the transportation, communication and utilities industries also are expected to have unpromising potential growth in workers comp.
In contrast, several service industries are expected to have much higher than average comp premium growth potential. Among these are business services, miscellaneous repair services, motion picture services and the ever vibrant health services, each of which is likely to offer substantial opportunities for carriers that are willing to develop niche market specialization within these still broad classes of business.
Higher Growth Territories - Within the overall US market, several regions are expected to have much better than average growth in workers comp exposures over the remainder of the decade.
Among these higher growth areas, the Mountain region is especially notable because of the strong payroll growth forecasts for both its goods- and services-producing sectors. In large part, this exceptional goods-producing payroll growth forecast is attributable to this region's continued strong pace of construction activity.
Also important to the comp market's outlook is continuation of slow payroll growth among goods-producing industries in the Mid-Atlantic and New England regions.
In conclusion, carriers traditionally have been highly attuned to changing rates and the regulatory environment in the states where they write workers comp. In today's increasingly dynamic and differentiated economy, however, rates and regulations provide only short-term and limited insights into the workers comp environment. Viewed in isolation, they are the equivalent of watching the Weather Channel for tomorrow's local forecast and ignoring El Niño developments.
The fundamental dynamics of the U.S. economy sketched above - slowing payroll growth, the shift away from goods producing to service-related industries, significant variation between service-related business classes, and marked differences in regional economies - are creating good opportunities for carriers able to craft their strategies in response and willing to aggressively pursue job classes and territories outside their traditional market focus.
However, as the old adage says, the devil is in the details. Successfully implementing a strategy to abandon fading segments and pursue promising new opportunities requires a thoughtful and fine-grained analysis of market potential and growth, and an analysis geared to actionable decision-making.
Such an approach is hard work, and may be new to your carrier, but rest assured, if you don't do it, your competitors will - and reap the benefits.