Paduda on Private Equity Firms Entering the WC Space
We tend to agree with Joe Paduda, the number of Private Equity ("PE") firms entering or at least studying the workers' compensation industry is on the upswing. The insurance industry had a similar 'intrusion' in the 1970's when equity firms entered the industry in the name of modernization, efficiency and cost cutting. The insurance industry was fundamentally changed. What was once a strong relationship between underwriting (the risks to be accepted by the company in exchange for a negotiated premium amount depending upon the coverages to be purchased) risk management and claims for the most part disintegrated. This is predominantly what we see now in personal lines, homeowners and auto, with the "take the coverage in the box for up to 20% savings" sales process, in many cases eliminating the need for a local agent. Underwriting by actuarial projection. Premiums were relatively stable. Fast forward 30 years, personal lines claims tend to be expected costs with much less emphasis placed upon thorough investigation and coverage evaluation as well as getting repairs or replacement done at a 'fair' cost. Many personal lines claims are handled direct, by telephone and insured/customer provided photographs with work done in many cases by contracted preferred providers. Efficiency is the cover story. Our thought is that by eliminating as much of the process cost as possible (non-allocated costs such as salaries, benefits, etc) from claims, the remainder are loss costs which go directly into the actuarial formulas for rate setting. And if all of the competitors are using a similar process, rates will rise and fall at roughly the same rate, so the crowd mentality protects everyone...including the PE firms heavily invested in high rates of returns. Now, in most states, rate increases are routine...and unfortunately appear far too frequent and bear less relationship to the risk accepted than in decades prior.
Customers, consumers of the insurance product, are not thoroughly educated on the product and services for which they pay premiums, a service previously provided by local agents. If the consumers don't know the difference, they will (and have) accepted the ever-increasing rates as just one of those costs in their lives that they have to plan for...not knowing that a more holistic approach to cost control (loss costs plus allocated plus unallollocated costs) might reduce the amount paid out by the company...which is the first variable entered by the actuary when beginning the rate setting study process. Decrease the total cost of claims by 5% per year, premiums might not only be held in check for a number of years, they might actually and justifiably be reduced.
Imagine if by managing the entire process a program was able to sustain a one time program reduction in costs of nearly 50%, and then maintain that level for a decade. This is the approach that our company has used for more than a decade as the TPA for a number of self-insureds, groups and insurance companies in the workers' compensation space. This is on nearly $110,000,000 in claims incurred. Doing things in a holistic way does matter...significantly...financially. A lesson lost when PE firms become involved in the cost cutting, efficiency mode. If the results continue into the workers' compensation realm that have evidenced themselves in the P and C insurance industry, the workers' comp industry will suffer.
From Joe Paduda: