The right focus: Vince Donnelly of The PMA Insurance Group addresses the challenges of a workers' compensation and disability market changed by terrorism, current economic conditions, and a tighter market

Risk & Insurance, April 1, 2002 by Denise Myshko

Risk concentration has taken on a whole new meaning since the terrorist attack last September. Now, the workers' comp industry is beginning to focus on things that once were not a variable in pricing this risk. Things such as how many employees are in a single location and what else you are insuring in that location are now important factors in assessing workers' comp risk.

At the same time, an economic recession, rising loss cost trends, and in particular, medical inflation are having a bigger impact on the workers' comp market.

For The PMA Insurance Group, a focus on the basics and on delivering quality service has begun to pay off. The Blue Bell, Pa., provider of workers' compensation insurance and integrated disability products, saw pre-tax operating income increase 7 percent in 2001 over 2000, from $21.6 million to $23.1 million in 2001. Net premiums written in 2001 were $355.5 million, an increase of 32 percent compared with 2000. The increase reflects improved pricing in workers' compensation as well as in all other commercial lines of business.

Vincent T. Donnelly, president and chief operating officer at The PMA Insurance Group, credits this to being an organization that is focused on customers and the delivery of the products and services its customers want.

In a recent conversation with Risk & Insurance managing editor Denise Myshko, Donnelly spoke about the challenges facing the workers' comp industry.

Q: 2001 results improved over the previous year. What do you attribute this to?

A: Results improved because prices in our lines of business increased, so underwriting margins improved. That is demonstrated by the reduction in our combined ratio. We experienced some profitable growth this year both in terms of retaining business and capitalizing on some opportunities in the marketplace with respect to new business. Our expense ratio also improved slightly. We continued to focus on expense management.

We've been a very focused organization in terms of the type of customers we are seeking, how we want to compete for those customers. Looking back to 2001, we had a pretty good year with respect to clients within our niche. We were able to expand our client base in 2001.

We're not developing any new product lines. Within our current product offerings of workers' compensation and integrated disability and other standard commercial products, there are opportunities to grow. We're comfortable with that strategy.

Q: What is the outlook for PMA for the rest of the year?

A: This involves the challenges of the workers' comp market. Pricing for all lines of coverage, including workers' compensation, is improving. The industry as a whole and specifically the comp carriers are being conscious of what can happen in loss cost trends and in medical inflation, which has begun to rise. While that has impacted the health care industry much more severely, it certainly has been an issue for the workers' comp industry and will become even more so.

We're very conscious of scrutinizing the services that we provide so that we are as efficient as possible and, at the same time, are responsible with respect to injured workers and their return to work when they are medically ready. For example, increased utilization can be an issue with respect to medical costs. This is something that PMA and the comp industry is looking at, making sure that utilization of medical services does not become an issue.

The workers' comp industry in virtually every state has experienced a decline in claims frequency year after year. That's really helped to mitigate inflationary trends in medical costs. The frequency of claims is declining. At some point, we expect that trend to reverse. Certainly, the recession could spur that. That's a challenge.

One of the most important ways we are addressing these trends is to continue executing loss prevention strategies with our clients to help them prevent accidents before they occur.

Also, as the unemployment rate rises, the ability to return people to work becomes challenging especially in terms of job availability and modified-duty programs. Increased duration of claims and subsequently increased indemnity and the medical costs is another trend.

The other potential threat with regard to loss cost trends in 2002 is any residual effect of the recession. Historically, in recession, the number of workers' comp claims has risen. But frequency appears to continue declining modestly. At some point, there will be a limit to the number of claims we can take Out of the system through preventive measures. I'm not saying we're there. I'm saying this is something we have to watch.

Q: What makes your company different?

A: Every insurance company needs to be competitive. We are an underwriting company. We are in the business of understanding and taking on risk and we try to charge an adequate price to do so. But beyond that, we're very focused on delivering quality service, executing on the basics.

We don't have any magical formula here. We are a regional company that balances between centralized and decentralized services with a very strong focus toward local service. We have 16 field offices in the company. Those offices are fully staffed with service people. This gives our company an advantage that I don't think many others have. I would like to think that if you asked this question of my employees they would tell you that they are very passionate about delivering that service. We take great pride in executing that.