Over the past several years, workers’ compensation insurers have been on a winning streak. Combined ratios are down, profits are up, and frequency continues to decline. As a result, premiums have continued to fall over the past seven years, with the National Council on Compensation Insurance dropping rates 7.2% from 2019 to 2020.
To maintain recent underwriting performance in the face of these rate cuts, insurers must innovate to reduce claim costs. Claim analytics using artificial intelligence represents a proven method to reduce claim severity and improve the efficiency of claim-handling resources.
In this article, Milliman’s Michael Paczolt and Jill Rosenblum provide a snapshot of the workers’ compensation industry and explain how machine learning can be used in claim management.
The population of Baby Boomers age 85 and over is expected to triple by 2050, according to the U.S. Census Bureau. This growth may result in a greater need for nursing home care services—increasing the industry’s risk exposure. In their recent Captive Review article entitled “Preparing for the Boomers,” Milliman consultants Jill Rosenblum and Tony Bloemer answer several questions nursing home management should consider related to their insurance programs.
Here is an excerpt from the article:
Am I big enough to self-insure?
According to the US Centers for Disease Control and Prevention, the average nursing home houses approximately 88 residents. Generally speaking, a single 88-bed nursing home is not big enough to take on much risk or start a captive. For a larger nursing home or system, the decision to retain risk is dependent on the financial stability and risk appetite of the insured. A [well-capitalized] nursing home system should consider a large-deductible plan and based on its annual insurance expense could consider forming a captive. Several concerns specific to nursing homes, such as the large variance of claim costs by state and the impact of Medicaid residents on claim frequency and severity, are important to consider when assessing the overall size of the [program] and the ability to self-insure. An annual insurance expense of $500,000 across all casualty coverages is a rough starting point when considering a large-deductible [program] or formation of a traditional single-parent captive. Forming an 831(b) captive, popular as of late, can be considered if the annual insurance expense is less than $1.2m.
What are the advantages and disadvantages of retaining risk?
Purchasing insurance provides financial stability in the short term but is less cost-effective in the long term. It is no surprise that insurance companies charge more than the expected cost of claims in order to generate a profit. Most small insureds are willing to pay the insurer a profit margin in order to [stabilize] their own results. However, when an insured becomes large enough to absorb some of its own volatility, it makes sense to start retaining some risk to keep the insurer’s embedded profit in-house. An easy way to do this is by taking on a large deductible. With the baby boomer generation on the long-term care horizon, now is a great time for nursing home systems in particular to reassess their insurance [program].
In the future will corporations emitting greenhouse gases be held liable for environmental damages induced by climate change? At present, there exists no coverage for damages stemming from climate change.
In a new article entitled “The cost of climate change: Will companies pay in court?,” Jill Rosenblum discusses how the uncertainty surrounding “climate risk liability” is creating an ideal situation for the next mass tort.
Here is an excerpt:
According to the U.S. Environmental Protection Agency (EPA), “Climate change is happening. Our Earth is warming… Small changes in the average temperature of the planet can translate to large and potentially dangerous shifts in climate and weather.” These environmental changes could translate to big costs for the property and casualty insurance industry. Of these estimated costs, property liability is the most obvious business line that would be affected as a result of an increase in frequency or severity of natural disasters. Other casualty lines that may be affected include flood, product, directors and officers (D&O) liability, and environmental, among others.
“Most of the observed warming since the mid-20th century is due to human-caused greenhouse gas emissions,” the EPA concluded. Furthermore, “The majority of greenhouse gases come from burning fossil fuels to produce energy, although deforestation, industrial processes, and some agricultural practices also emit gases into the atmosphere.” If future litigation is able to demonstrate a link between environmental damages and greenhouse gas emissions by large corporations, could environmental damage caused by climate change be the next mass tort?
Currently the biggest case tried on the topic is the 2011 U.S. Supreme Court case of American Electric Power (AEP), which pitted five large-scale private electric power companies emitting greenhouse gases against the City of New York and eight additional states. Dr. Richard H. Murray, special advisor to the Geneva Association, describes the case’s verdict as “unusually opaque, generating a multitude of conflicting interpretations.” While little was decided by the case, Murray explains, “The decision may fairly be described as either approving, or not specifically disapproving, of any of the avenues for climate risk liability that were presented in the case. That is why the U.S. floodgates of liability claims will be open for the foreseeable future.” This is evocative of the tobacco litigation of the mid-1990s. Michael B. Gerrard, director of the Columbia University Law School Center for Climate Change Law, explains, “They lost the first cases; they kept on trying new theories and eventually won big.” So while the AEP case may not have specifically created a path to indemnification, the fact that it didn’t rule out any possible future litigation efforts speaks volumes. The ruling may be an indication that such potential efforts may in fact be successful in the future.