The collapse of some investment banking firms and the government restructuring of Chicago-based insurance giant American International Group has generated some uncertainty as to how the financial crisis on Wall Street will affect funds for workers’ compensation. Some insurance executives, however, are optimistic.

Related Links: Steel Price Spike Meets Credit Crunch Crisis Changes Demand Side of Costs Prices Slip After Last Spring’s Spike Bottlenecks, Labor Shortages and Volatile Prices Produce Sticker Shock New Index Spotlights Spike in Powerplant Construction Costs Tight Labor Markets Push Wages Up Complete Report

“Our organization sees ample amount of risk capital, even a surplus of $1 trillion, in the insurance marketplace. It is still considered a good place to invest,” says Matt Walsh, managing director at Aon Construction Services Group, Chicago. He says that total is appreciably more risk-capital capacity available than before Sept. 11, 2001, so there is a tremendous amount of cash flow in the marketplace. “It means we will see prices continue to be stable,” says Walsh.

Investors consider insurance a good place to invest because companies have returned to focusing on underwriting discipline rather than on returns from their financial investments. “As a result, they are getting a fair return from their underwriting,” Walsh says. Underwriters look at a company’s safety record, loss history and business operations. Despite recent high-profile crane accidents, Walsh notes the industry’s overall safety record involving severe impacts is better and that many contractors have improved their loss histories. “Insurers will reward safe contractors with good pricing. It’s a very competitive marketplace,” he says.

The National Council on Compensation Insurance has made 21 filings to states since July 1 for changes in workers’ comp premiums. “Four are for rate increases, but the rest are decreases,” says Peter Burton, the council’s senior division executive for state relations. About three-quarters of the remaining 17 filings will be for rate cuts, he says. The driver is success of workplace safety programs, Burton says. The reduction in injuries is following a 15-year trend, which now shows workers’ comp claims 53% below where they were in 1993. The District of Columbia is seeking a 14.4% decrease, with Florida at 14.1% and Hawaii 11.6%.

California is the notable exception. The Workers Compensation Insurance Rating Board in August recommended a 16% increase in premiums effective Jan. 1. State rates had dropped more than 35% since reforms were enacted in 2003. Industry observers say savings have already been wrung out of the system and medical costs are driving insurance rates higher. The state board says 10.8% of the rate increase is for higher medical costs and 2.8% for loss-adjustment increases.

Even so, across the U.S. rate cuts are a manifestation of insurance carrier profitability, says Burton. “The general trend is that prices are soft and getting softer,” he says. The big challenge for insurers is to maintain pressure on construction industry firms to run safe jobsites and for states to control medical costs, says Douglas Holmes, president of Strategic Services on Unemployment and Workers’ Compensation Insurance, Washington, D.C. “The payment numbers are trending down, but the medical payments are still trending up,” he says.

Use of objective medical standards is gaining acceptance as a way to manage medical costs. California’s reforms, including managed care, treatment protocols and medical fee schedules, sent medical costs down 16% in one year. The objective standards also take the subjectivity out of determining workers’ compensation awards, Holmes says.