Last Fall, as it always does, the National Association of Insurance Commissioners (NAIC) released its “Report on Profitability By Line By State”. Because of when data are reported, the most recent Report is for 2020. California’s workers’ compensation line of business posted a very respectable 10.9% return on net worth. This bests the performance of the line nationwide (9.6%) and of large premium volume states such as Florida (7.9%), New York (8.3%), and Texas (8.2%). But profitability alone does not tell the tale of this market – by far the largest in the United States.
For more insight, one should look at the “2020 Market Share Reports for Property/Casualty Groups and Companies By State and Countrywide”, also published by the NAIC.
First, it is important to note that almost twenty percent of the nation’s workers’ compensation insurance premium is written in California. How the line performs in California is an important factor in how the line performs nationwide. Second, insurance rate laws differ widely between the states and, of course, in some states private insurers have no presence. So it makes it even more remarkable that in a state where competition truly drives the insurance marketplace, the return on net worth is so favorable.
But the key to a good marketplace is found in two metrics. The first is the concentration of carriers writing in that market. For California, the market share of the top ten carrier groups is a very respectable 57%. In other words, the market is not so concentrated as to inhibit competition. For example, other large market states such as New York (76%) or Texas (74%) are far more concentrated. There are, of course, significant differences in markets – particularly in Texas with many large risks opting to be nonsubscribers. Also, the role of state funds changes the competitive environment considerably, such as in Colorado where Pinnacol Assurance alone writes 55% of that market.
The fact is that the California workers’ compensation insurance marketplace has been very competitive for quite some time. That is good for everyone. That inevitably leads us to the second point – predictability. The marketplace works best when underwriters have a good sense of what the risk is to write a particular business in a particular classification. It is not always a simple process. Carriers establish their risk appetites and assess whether to make the “opportunistic play” to add business that, in the long term, will be profitable. Technology has incentivized private carriers to look more aggressively at smaller business whose workers’ compensation insurance needs are less complex than larger risks who may be looking to loss sensitive plans as a way to meet their obligations to workers. In California, the marketplace will accommodate those needs.
All this happens in California because we are looking at a system that has for a least a decade – and almost two – been predictable.
But because of the sheer size of the system and the sometimes-lax oversight of it, California also attracts more than its fair share of fraudsters and schemers. Misclassification, fraudulent certificates of insurance, and schemes to exempt employers from their workers’ compensation obligations continue to weigh on the marketplace and harm employers and employees alike.
So, as we begin a new legislative session in Sacramento, we must remember and defend what is right about how workers’ compensation insurance is transacted in California. At the same time, we must with equal strength continue to fight the wrongs in the system wherever and whenever they present themselves. Competition is what makes this insurance marketplace work – and we all have a stake in making sure that competition if fair and honest.
Note: The opinions expressed herein may or may not be those of Workers’ Comp Executive. Mark Webb is a former Arizona insurance regulator, insurance company chief compliance officer, and is an expert in corporate governance, risk and compliance. He is the owner of Prop 23 Advisors.