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AIG's Chief Actuary: Profitability In Workers Comp Attainable

Source: Susanne Sclafane, Advisen

Posted on 12 Jun 2012 by Neilson

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AIGProfitability is attainable in the workers compensation line, AIG’s chief actuary suggested at an insurance conference last week, laying out a strategy for tackling claims inflation and uncertainty head on.

“We’re not helpless,” said Charlie Shamieh, senior vice president and corporate chief actuary for American International Group. “Yes, rates do need to be increased. But there are a lot of things we as an industry can do,” he said, stressing that “far more active claims management and risk selection” can also drive profitability back into the line.

He described how AIG undertook a study last year of 27 million workers comp claims that it had on its books from last decade, analyzing claims drivers for sub-portfolios of industry, geography and occupation groups, going on to explain that a newly reorganized claims organization is applying the knowledge gained from the analysis to active claims management.

Shamieh made the point twice during a session on loss reserving and workers comp trends at the S&P Insurance 2012 Conference in New York—once after a rating agency analyst declared that there is “no prospect for profitability” for insurers participating in the line, and later when an audience participant asked about the high degree of uncertainty in the claims inflation assumption that actuaries are faced with when trying to estimate loss reserves for workers comp.

During the two-day conference, Shamieh was the only speaker to offer even a glimmer of hope for workers comp insurers. A day earlier, David Long, president and chief executive officer of Liberty Mutual Group, was the first executive to talk about workers comp challenges. “We see an opportunity for negative growth in commercial lines, particularly in workers’ comp.”

“If you don’t get the right price given where medical inflation is headed, [then] you get addition by subtraction,” Long said, explaining his company’s decision to shrink that business in respond to a question about growth opportunities in the United States.

Later, responding to an audience question about claims trends and reserving issues, Long said, “When you write a workers’ comp policy, essentially what you’re now writing now is lifetime medical cover with no limit.”

For “folks that start with one injury, we’re seeing more and more that every other ailment is tied back” to those cases, prolonging the life of each claimant, he continued.

“The single line of business that continues to develop unfavorably is workers’ compensation,” Long said.

At the reserving session, Siddhartha Ghosh, director of S&P Rating Services, said S&P believes workers comp reserves for the industry as a whole are inadequate, without attaching a specific figure to the amount of inadequacy. He added that while there’s been some positive rate movement since late last year, there’s still a lot of ground to make up, he suggested, reading off industry combined ratios of 108 for 2009, 116 for 2010 along with a projection of a 114 for 2011 from the National Council on Compensation Insurance.

“How in the world are you going to make money with a 114 combined ratio and a 2 or 3 percent investment yield,” Ghosh asked, going on to counter the idea that investment income could prop up bottom-line results for a long-tail line. “It’s a money-losing line,” he said. “There is not much prospect for profit.”

Shamieh agreed with Long and Ghosh, who both pointed to the negative impact of macroeconomic trends—particularly unemployment levels—on workers’ comp claims frequency, but Shamieh insisted that some aspects of the costs of claims are actually controllable.

Referring to the results of the 27-million claim study, Shamieh said that a sudden spike in unemployment—from 6 percent to 10 percent nationally, and up to 15 percent for the construction industry at one point—had a “statistically significant impact mainly on lost-time claim frequency.” Lost-time claims are the most expensive, he added, noting that the average cost is between $70,000 and $80,000, while medical-only claims average roughly $3,000.

Still, Shamieh said that AIG found differences between different employer sizes, different industries and “structural drivers” that are driving costs, highlighting the use of pain management, in particular.

AIG is investing heavily in claims management. “We see that as providing substantial first-order impact on the profitability of this line,” he said.

An audience member queried Shamieh about whether AIG actuaries explicitly estimate inflation rates for the next 10 or 20 years when setting reserves, prompting the chief actuary to provide greater detail about the cost study and to suggest that by informing the claims team on cost drivers, the actuaries and claims professionals together can impose more certainty on hard-to-determine inflation rate.

“Historically, actuaries set inflation by looking at the past and extrapolating into the future,” but AIG’s recent study proves that they “can’t possibly look at the last few years and extrapolate into the future.”

Instead, he said, the AIG actuaries “looked at decomposing medical inflation.” Working with economists in the school of public health for John Hopkins University, the actuaries studied the effects of California-like legislative reforms—a systematic cost component, the effects of which have already subsidized—and other non-systematic cost levers that the carrier can actually pull to impact profitability.

“We decomposed [medical inflation] into components of inpatient, outpatient, drugs and home health care, and in each one of those, there are substantive things that we can do ourselves in terms of [handling] our claims,” he said. “We have about 180 clinicians in Farmington, Conn., [the home of] Chartis’ medical management services, and we have been studying with them how we can actually influence utilization [and] intensity of care, which are far bigger drivers frankly then the cost of goods and medical CPI inflation.”

“There’s a lot waste in the system,” Shamieh continued, noting that AIG’s analysis based on its own data, supports other industry studies that highlight the “abuse of opiods [as] a huge the societal problem.” In addition, he listed “the use of MRIs, and treatments that don’t follow clinical protocols” as problematic. “They’re frankly the key drivers of medical inflation.”

So “we’ve been trying [not to] just sit here and draw a chart of where inflation is going to go, but [to] tie that view to actual claims management activities that are designed to achieve a certain outcome.”

“You can never be perfect in that, but as soon as you provide the link, then the actuaries are not sitting in the back room, they’re there front-and-center with the claims team and the underwriting team and making that a far more dynamic process,” he continued. “In my view, you are far less susceptible to these sudden jumps—[when] you make one assumption and all of a sudden you wake up and realize that it’s wrong,” he said.