In this episode, ADJUSTED welcomes Bob Hartwig, Director of the Risk and Uncertainty Management Center and Clinical Associate Professor of Finance at the University of South Carolina. In this episode Bob, discusses some of the impacts that COVID has had on the Workers Compensation community and on the economy as a whole.
Season 4 is brought to you by Berkley Industrial Comp. This episode is hosted by Greg Hamlin and guest co-host Matt Murphy, Vice President & Managing Actuary at Berkley Industrial Comp.
Comments and Feedback? Let us know at: https://www.surveymonkey.com/r/F5GCHWH
Visit the Berkley Industrial Comp blog for more!
Got questions? Send them to marketing@berkindcomp.com
For music inquiries, contact Cameron Runyan at camrunyan9@gmail.com
In this episode, ADJUSTED welcomes Bob Hartwig, Director of the Risk and Uncertainty Management Center and Clinical Associate Professor of Finance at the University of South Carolina. In this episode Bob, discusses some of the impacts that COVID has had on the Workers Compensation community and on the economy as a whole.
Season 4 is brought to you by Berkley Industrial Comp. This episode is hosted by Greg Hamlin and guest co-host Matt Murphy, Vice President & Managing Actuary at Berkley Industrial Comp.
Comments and Feedback? Let us know at: https://www.surveymonkey.com/r/F5GCHWH
Visit the Berkley Industrial Comp blog for more!
Got questions? Send them to marketing@berkindcomp.com
For music inquiries, contact Cameron Runyan at camrunyan9@gmail.com
Hello everybody and welcome to adjusted. I'm your host Greg Hamlin coming at you from beautiful Birmingham, Alabama and Berkeley industrial comp. And with me is my co host today, Matt Murphy. Matt, if you could introduce yourself for everyone.
Matt Murphy:Yeah. Thanks, Greg. As you said, Matt Murphy here on the actuary at Berkeley industrial comp. Also coming to you from Birmingham on a beautiful morning. I'm super excited for the guests we have.
Greg Hamlin:Absolutely. We have a special guest today with us. Bob Hartwig, who is the clinical associate professor of finance and insurance at University of South Carolina, and also a little bit work comp famous when it comes to being kind of the voice of what's going on and workers compensation at AIA s each year. So, Bob, we're glad to have you with us.
Bob Hartwig:Very glad to be here, Greg, and I'm looking forward to it. Well,
Greg Hamlin:one question, Bob, we always like to ask because I know very few people who when they were in kindergarten on career day decided they wanted to go into workers compensation. I'm curious on your story, Bob, how did you end up in the financial insurance industry?
Bob Hartwig:Yeah, so yeah, I did not go to elementary school open up in the workers comp business. So one day, and like many people, you kind of fell into the industry. And in my particular case, I was finishing graduate school, I like to crunch a lot of numbers was basically a statistician, although my PhD is in economics. And as it turned out, that wound up being a good match first for a government regulatory agency where my job title was statistician, and then ultimately into the insurance world, where I worked within an actuarial group at the NCCI. So as it turns out, my econometric background and the background of Actuaries there was a lot of commonality, we just spoke different languages. But we kind of all knew and appreciated what each other was doing. And I think working within that group, it was a one plus one equals three situation. And so I think at that time, we made a lot of advances in areas like ratemaking, and so forth. And I very much enjoyed it, I enjoyed the people I worked with. And so my first exposure in the insurance world was workers comp. I knew I didn't want to be pigeonholed in that respect, my whole career. So after about five years, I moved on to Swift rate, where they were interested in me to work in their health, reinsurance area in a research area in a research capacity, because that was the closest thing they could get to someone who had some health kind of exposure with someone who was in workers comp, which is kind of a hybrid product. And then, from there, I went on to the Insurance Information Institute as their Chief Economist and ultimately, their president, I've loved my career, and the last six years decided to sort of give back if you will, in the academic world, which is what I actually planned on doing when I parked on a PhD. One, God took a 23 year detour.
Matt Murphy:So Bob, I got a question. You know, when I'm studying for these actuarial exams, especially like the comp section, I was shocked by the paper, the date some of these papers were written, right? So like, I'm reading things on the experience rating plan that came out in like the 30s. Right. So I feel like in this industry, you know, especially I want to ask you this, there's a lot of things that seem like they've been figured out for a long time, right. And it may seem like a slow to move, in your experience, what has changed the most from when you sort of slid in, as you said, as a statistician, and went through all those those different stops? Looking at the industry, what what would you say is changed?
Bob Hartwig:You know, that's an interesting question, because in the world of comp, which is actually just over a century old, so it is actually not that old relative, when you think about commercial property. And you think about marine and even the auto line is all workers comp, someone who was a pioneer and workers comp in the 1920s, would very much recognize what workers comp is like today, both in terms of how rates are made, the regulatory environment has changed. But it's remained pretty much true to its original intent and its original structure. And that's, I think, largely to workers comp credits, although there are some issues with that. I think today, if you you know, you mentioned studying for exams. So today, I think that insurers tend to have longer experience periods that they might use to building into their rates. So when I was at NCCI, we only had, I don't know, seven or eight years worth of data that migrated up to 10 or 11 or 12. Now my understanding It's closer to 20, somewhere around there. So there's an opportunity to look at much more data over a much longer period of time. And I think that's important because that allows you to kind of capture pricing cycles. It allows you to capture underwriting cycles, and allows you to capture more in a way of economic cycles that can affect frequency and severity, and allows you to capture periods when inflation is accelerating, or it's relatively modest, you know, right now we're in a period of accelerating inflation. So having all that sort of experience, I think endures to the benefit of workers comp. But if I were to step back and think about your question more broadly, because something I'm involved in right now is a lot of property insurance issues. And this happens to be the 30th anniversary this month, August 2022, is the 30th anniversary of Hurricane Andrew. And so in some ways in my career, the greatest innovation in the PNC insurance industry, has been the greater use of modeling, which is also associated with the ability to collect and analyze ever increasing amounts of data at lower cost. Now, that parallels what's going on throughout the world in a in many, many different disciplines. But I think that, you know, with Hurricane Andrew being the event, to which we could kind of trace the modern era of modeling in PNC insurance, to that extent, these are technologies and techniques that really wouldn't be recognizable to someone who was operating in this business 100 years ago. So and that has allowed this industry, irrespective of the line of coverage, we're talking about, to be able to continue to attract capital to develop new types of instruments. So we have yet in the world of property insurance, and even life insurance, we have, you know, catastrophe bonds, and all kinds of insurance, linked securities, those sorts of things haven't necessarily penetrated at workers comp at this point. But it's allowed the insurance industry to keep up with innovations and economic growth, development in finance. And that's, that's been a good thing. And so, you know, I, when I teach now, I, I enjoy teaching about things like insurance, linked securities, which are things that literally didn't exist a couple of decades ago. But at the same time, you know, worker's compensation is maybe relatively unchanged as it might be, is still something very interesting to students, they haven't heard much about it. They're only generally exposed in their own personal life to things like worker to auto insurance, maybe renter's insurance, or maybe even health insurance. But talking about the world of Workers Compensation is fascinating to them. And quite frankly, there's always a lot of great stories to tell. So that's
Greg Hamlin:So Bob, my question with that you've mentioned that you love teaching. And I know that's what a big part of what you're doing now, how do we attract more talent into this industry? Because we've got a little bit of a talent crisis, I think, you know, maybe not just isolated insurance in general. But there's a whole generation that's retiring. And I think all three of us, I think Matt said before he kind of fell into this industry as well. How do we change that? Or what do we do different if we're going to attract top talent into the sector?
Bob Hartwig:So I've been here six years now at the University of South Carolina, and even before that, people were talking about the talent crisis in the industry. And you know, how do we attract top talent? Okay, well, we have one of the largest risk management insurance programs in the United States of third or fourth largest here at the University of South Carolina. And we produce about 8090 graduates per year. And our students, they might have a degree in Rmi, but they often double major in something like finance, they're within the business school. So they're going to be attractive to a lot of different employers, some within the insurance world and many outside the insurance world. I often say to insurers, who automatically assume all of our graduates are going to line up and go to an insurer or broker, that fact, your biggest competitors, the banks, and the consulting firms, and there are right because the way that we teach risk management is a very holistic approach. So a student should be prepared enough to be a risk analyst kind of bank, but be able to do something similar at an insurer as well. So long story short, but if I were to drill it down to sort of one piece of advice, if you want top talent to be attracted to your company, the number one way to do it is to have a strong internship program. Students will generally sign on with the company if they've had a good internship experience, and generally they do. But if you're a company kind of cold calling, if you will, to a bunch of students who had internship experiences, the odds are already greatly stacked against you. Because student is likely to go with what they know they have a good sense of the work culture, then good sense of the salary and benefits. They have a good sense of the career path, what sort of training is going to be available to them. So you're kind of Overcoming a hurdle so, so having a strong internship program where you recruit from students around the country into a variety of disciplines, those internship programs can be structured very differently, they could be put into a particular area, there could be some sort of a rotational thing. But however you do it, that internship program is going to give you a leg up.
Greg Hamlin:I think that's great advice. We started doing that a number of years ago, and we've had some great results with exactly what you said, people coming, getting exposed to the industry and saying, Wow, this is a career I hadn't even thought of. So I think that's great advice.
Bob Hartwig:You know, and then beyond that, we like to invite a number of companies every semester, I have them nowadays, by zoom, it's easiest thing, but have them speak to a class, maybe a class and property liability insurance or, or an introductory, Rmi. Course, whatever might be appropriate. And there'll be one or two people, typically from the company, hopefully, at least one of them is relatively close in age to the students, someone who was recruited within the last two to five years, maybe someone who else is a bit more experienced, and who could talk about the interesting features of their job and how they came to that job. And what they like about it, where they see their career heading and what kind of in oftentimes the top. And, of course, it's helpful if the company also is recruiting, so they're able to talk about, here's a list of jobs that are available, here's how you apply for them.
Greg Hamlin:That's great. I, I like to think that I still look like I did when I was 25. But I know the grade here reveals a perfect set of kiddie gold. So having somebody young, who's who they can relate to, I imagine is pretty helpful for sure.
Bob Hartwig:Yeah, it definitely is because they can talk about friends. One common question students have is what was the hardest part of the transition from being in college to the working worlds. Now, for some, for a lot of students, it's sort of having that day to day structure of a job where they have to be a certain place at a certain time, and you know, all the new things they have to learn. And so that's a new experience for many of them. And many of them are doing that in a new city. And so they like to hear about that and then share their contact information or LinkedIn. And so it's, it's been my experience that sometimes a student might not sign on with that company right away, but at some point in the future, because the student is able to keep in touch with the individual and the individual from the company will say, hey, you know, we've got this opportunity might be a good fit. So there's kind of a win win situation there. And it really transcends the semester that the student is in contact with the company representative. That's great. So Bob,
Matt Murphy:I'll jump in here and say, you know, I guess you mentioned Hurricane Andrew in 92. And how that sort of changed the way the PNC industry looked at things. Obviously, we had something that hit two years ago, or this March of 2020, that I think when it first hit, all of us can remember those first few weeks of uncertainty. But I think especially in the PNC side, there were some big question marks. Oh, yeah, I would just ask you, you know, now, with a little bit of time, a little bit of hindsight, looking back, what was the impact of COVID? On, you know, workers compensation specifically. But, you know, I know, we want to talk about the whole economy as well. But let's see it first through that lens of comp.
Bob Hartwig:Yes. So interestingly, if you were to look at the industry's aggregate underwriting performance in 2020, it was pretty much the same in 2019, it was pretty much the same in 2021. So a historian looking back at these data, in the aggregate, will not see any discernible impact from COVID. That's a truly extraordinary thing. Because in the early days of COVID, April, May June, there were predictions from Willis towers, Watson and so forth, that this, this could produce$100 billion, potentially, in losses with actually in some scenarios comp leading the way with maybe $90 billion dollars or so in terms of insured losses. And at that point, we didn't have a good sense of, of how rapidly this disease would develop, how virulent of fatal it actually was, how many people would remove from the workforce, how expansive the presumption requirements would become for workers comp, as it turned out, workers comp, at least according to NCCI, produced if hundreds of millions or excuse me, COVID produced hundreds of millions of dollars, maybe a billion dollars or more. I don't know that will actually ever know the final number because clearly a lot of people got COVID and called in sick but it never wound up being a comp claim. But at any rate, the pandemic wound up being far worse of a threat than the PNC insurance industry originally anticipated either in comp or in the business interruption space on the on the property side, which is actually the area that got most of the attention with 1000s of lawsuits being filed against commercial property insurers, which insurers had to litigate but ultimately prevail. So the sum total of the pandemic is that the industry once again I was able to demonstrate it that the fact that it is a sound stable, strong, secure business, it's very, very resilient. You know, we have to remember the Dow fell and the s&p fell by about a third. In the early days of COVID, interest rates were dropped next zero. We went from that to a period of inflation to higher interest rates. And so through all this economic oscillation, all this economic volatility, insurers not only were able to manage through COVID, but they were able to manage through what were some of the most costly years ever for in terms of catastrophe losses, for instance, all that was going on. At the same time, they were facing a lot of regulatory pressure, there was pressure on the investment income side, there were things going on elsewhere in the world that impact a global insurers. But you know, Matt, to kind of harken back and I think earlier in my career, and I would actually still ranked us ahead is more impactful, and workers comp was 911. So we're we're on the 21st anniversary of that basically now. And in my office happened to be three or four blocks from Ground Zero, I saw the whole thing happen with my own eyes. And again, to this day, that does remain the largest single comp loss in history, most of the people who died were injured that day were in fact, on the job. And it was more costly than the pandemic, at least from fatalities, I could see on an inflation adjusted basis right now in the comp space. So, you know, I mentioned talking about Andrew 30 years ago, that was 911, about 20 years ago with a pandemic just two years ago. You know, there have been, you know, other things that have occurred in between. And one thing is for sure, and I tell this to my students is that every several years, there's going to be something that happens in this industry that you didn't anticipate, or it's going to be a variation on something that's never happened before, sort of a natural disaster, like we've never seen before, could be a magnitude or scope or a location or whatever it is. But again, the pandemic, it's quite likely that you and I will never see a recurrence of this in our careers, at least not to the same extent, we'll hear about small things like monkey pox, or, or what have you. But if you look at history, these sorts of things only tend to occur probably once in a career if if that. But again, I've learned you've learned brands learned that you know, expect the unexpected and against so an industry like ours that is very well capitalized, that is very heavily regulated, is the type of industry that has managed to survive all of these unanticipated events. Whereas, if we look over on the banking side, for instance, we're kind of looked at where the steps stepchild in the financial services world, but the banks every 20 years or so they wind up managing, managing to find a way to crater the economy. During the financial crisis and 2008 2009. They did sort of around the.com early.com era just before that, and there are many other times when banks have cratered the economy, but insurers have been strong during the pandemic. And during the financial crisis. The one thing you did not hear is oh, boy, I hope my insurer won't fail. Right, right. Right. There's hundreds of banks fail. But nobody was talking about, apart from the AIG situation, which was completely separate from its insurance operations, and its insurance operations remain strong. The industry actually what I think was a was kind of a shining star during the financial crisis. And that's how we want to keep it.
Greg Hamlin:That's great insight. Bob, I know, you've heard this. We've all heard it when we've turned on the TV when people start talking about the economy in general. And are we heading towards a recession? Is it worse now than in the 1970s? You know, my parents, I remember stories of them trying to buy their first house and what they had to pay for it. Yeah, interest rate wise. And I think there's general concern, maybe it's been over amplified, but I'm just curious on your take of host COVID coming out of the pandemic, is the economy in a worse position than it was back then?
Bob Hartwig:Absolutely not. And I've analyzed this again, as an economist and kind of a student of history. You know, I've looked at the historical performance of the PNC insurance industry, but the economy at large, but if you look at consumer sentiment right now, and even business sentiment, consumers think the times have almost never been worse that most people think we're in a recession and that business leaders are planning on there being a recession. In my view in the second quarter of 2022. We were not in a recession. I was saying that months ago, even though you were hearing that drunk being beat louder and louder. It is true. We had two consecutive quarters of negative real GDP. That's just one crisis. area. And when you look at the tightness of the labor market, and in fact, we just got the July labor market report that showed the unemployment went, rate went down. And that's we blew the doors off the number of jobs that were expected 528,000 versus the expectation of about half that no way that that's level of strength in the labor market is consistent with the recession, the economy slowing for the last two quarters, it's largely a result of the record growth that kind of got pulled forward in 2021. And also, because of the accelerating inflation, now, it is that acceleration, inflation that's got people feeling really, really bad, you know, what would make them feel worse if they also didn't have a job. And, and that was exactly the case in the 1980s. So not only was the unemployment rates, about 10% or so, in fact, at various points in time, but the inflation rate was running in excess of 13%, compared to about 9%, in June, and this period of relatively high inflation, and relatively high unemployment lasted not just for six months, or a year, it essentially lasted for the better part of it, that gate where there were several recessions between the mid 70s and the early 1980s. And we have the situation is not even remotely comparable today. So we have unemployment rate of three and a half percent. The most recent reading on inflation, again, with 9.1%, for June, that number is assuredly going to come down with lower gas prices, and so forth, as we move through the year, lower commodities prices. And the expectation is that we will probably be looking at inflation in 2023, three and a half to 4%. That's higher than the 2% of where the Fed wants it. But to the extent that the trade off is unemployment remains relatively low. That's probably an acceptable trade off the markets. When you look at longer term bond yields, you look at expectations for inflation, you just don't see the expectation that we're going to see 9% inflation out for the foreseeable future, or even 5% inflation, or quite frankly, even like 4% inflation. Ultimately, this is a country in a world that is a wash in excess savings accumulated by ageing populations around the world. And that kind of environment doesn't support a long term inflationary outlook, along the lines of what we've seen for the past several months. So again, when historians look back at the period from when the pandemic began, say in March of 2020, we'll see a period where it looked like the economy collapsed, the economy grew back robustly, there was an enormous amount of government stimulus that was applied in a relatively short period of time monetary stimulus, it's almost inevitable that you're going to get some inflation, we're seeing it not just here, but the UK is seeing very similar levels of inflation, as are other parts of Western Europe. And eventually, you know, we'll see an oscillation sort of back a kind of a reversion back, I think, to the mean, which means relatively low unemployment rates, and relatively low inflation rates, will inflation be as low as it was prior to COVID. At 2%, I think it'll probably settle somewhere above that, maybe closer to 3%. And an unemployment rate, maybe closer to 4%, versus three and a half percent. But that would, through the majority of American history, that would be considered extremely good economic conditions. Of course, we're going to have shocks and recessions and so forth in the future. But right now, from what we can see that the future has not been as many people and businesses seem to believe it to be a part of that is because, you know, we live in a 24/7 365, you know, media echo chamber, where everything, including the economy is very heavily politicized. And, you know, if you if you listen to one TV station long enough, and they say it's a recession, the recession and recession, you will come to believe that there's a recession no matter what the actual evidence might say, to the contract.
Matt Murphy:So Bob, I want to drill down a little bit into inflation. Obviously, it's the topic does your but what I always find interesting is when you do a breakdown, of course, we're always getting this one number, it's 9.1. But you can look at different slices, and sometimes it goes the other way, right? You look at college textbooks, they're going through the roof, the price of electronics, hey, they're a lot cheaper than they were 15 years ago. I think in particular, through the lens of me and actuary here. I'm very interested in the medical inflation side and I think, you know, since COVID, I think it used it would outpace sort of everything and it almost seemed like when COVID hit that went the other way. And we're sitting here scratching our heads. Are the CPI numbers really? Correct? Yeah, on the MediCal, it's lower than we expect. So can you explain some of that and where you see that going in the near future.
Bob Hartwig:So inflation did surge in the wake of COVID. But it was mostly driven by goods. In other words, you know, people were sitting at home and they, they went on Amazon, and they ordered everything they possibly could with their stimulus jacks, and they wanted to buy cars and build bigger houses and all of these sorts of things. And because of lockdown, and so forth, and restrictions on travel, what have you overall, demand for services, including health care services fell during COVID. Now, we heard about hospitals full of people who are sick from cold but the reality is, there's all kinds of stories about people foregoing visits, doctors, and diagnostic treatments and routine screenings and all these things, even vaccinations, routine childhood vaccinations, in fact, some of this is still depressed. So demand for healthcare services actually on net fell substantially during COVID. So there wasn't as much inflationary pressure there. So what we are starting to see now is that throughout the service economy, which includes health care, inflation is beginning to pick up a little bit largely through the wage track. So you've got increased demand for healthcare workers, who are demanding higher wages, nurses, and so forth. So you're seeing pressure on medical costs, as a result of that. So but generally, through the economy, service sector, inflation is lagging behind commodities. So I expect sometime next year, they will affect effectively equalize as commodities, inflationary pressure kind of wanes, but services pressure continues to rise. So I think that historical relationship where the cost of health care rises faster than everything else, will be restored probably sometime next year. Now, you mentioned something that that's interesting when I started NCCI, way back when well, more than half of the total worker's comp dollar claim dollars, if you were was somewhat over half was spent on indemnity, and the remainder was spent on medical, and then it came to be about 5050. And now I think the last time I saw medical was maybe around two thirds and identity is around 1/3. And that's a result of the fact that healthcare costs have risen much faster than say, wages over the past three years, which is close to when I started at NCCI. I would expect that to continue that the cost, this current period of time that we're in is actually an aberration. I don't expect that to persists. And the reasons for that are, there's an inexorable upward creep in healthcare costs related to technology. And that includes, you know, pharmaceuticals, and all kinds of other sorts of treatments, medical devices, and so on. You've got other factors, like an ageing workforce is is still out there. And so to expect those medical costs continue to rise, you know, that said, you know, if we look ahead, I'm actually pretty optimistic and something I teach, like, in the last week of class, I talked about what you maybe what's ahead for insurance, and you think about these sorts of the workers comp contexts, devices that workers could be outfitted with, that could let their employers know, for instance, are they on the verge of heatstroke, okay, are they lifting properly to avoid some sort of muscular skeletal sort of injury, and we're talking about, you know, devices like something as simple as a wristband, or a vest that can measure location and movement and temperature, and all of these sorts of things. So I think that ultimately, over time, more and more dangerous jobs are going to be replaced through automation, for example. So I think that the workplace as it has been, for the last eight years, really, since the 1950s, or so has been getting safer. And workers comp insurers are a big part of that long term commitment to risk management that we have with our partners in the in the corporate world, our clients. When you think about it, if you look at historical data on the likelihood of of dying and an occupational injury, or developing an occupational disease or even being injured in occupational context, if we had to go back to the days that everybody think is great, like the 1950s, we would think it's a killing field. Okay. If you went back to the early days of workers comp, or workers comp was a reaction to the horrendous late 19th century industrial age where, you know, children and women and men were being killed with no recourse whatsoever. So we live in a in sort of a golden age, almost, of workplace injuries, and deaths and the numbers are are, again, when you look at the trends, you know, you're almost less likely to be killed or injured in the workplace than any time in history. And I would expect those improvements to continue one area that's I think, just just over the horizon, for example, motor vehicle deaths and injuries that are occurring, the occupational context, we're talking about, I think, we're talking about fleets of autonomous trucks, delivery vehicles, deliveries by drones instead of by truck, all sorts of automated processes, processes that will replace some of the most dangerous jobs that humans have have in the current day and age.
Matt Murphy:So does that mean you feel, you know, obviously, you're saying frequency is down, it's kind of always going down, inexorably, severity kind of goes the other way, you know, the sort of multiplication of those two sort of determines the rates. And the last cos comp is definitely a slice of the PNC market, that has not seen the hardening that I think other lines have seen. We've seen negative loss costs, you know, decreases sort of across the board. There are some minor exceptions. What do you see the outlook for that? Is it more of the same?
Bob Hartwig:For what I can see for the next few years? Yes, I mean, if you go back in history, it wasn't that, you know, workers comp insurance didn't know how to manage injuries, they didn't price the product appropriately. So in a soft market, they would just, you know, pack premiums in a way that was simply insufficient to meet the claims expectations that they had. But yeah, we've been looking at workers conflict combined ratios, the mid 80s are 87 or so some of that is due to prior year reserve releases. And there's some more of that come. But right now this there's nothing out there that really suggests that worker's comp is on the cusp of a massive deterioration along the lines of what some other PNC lines have seen. In the last few years. You know, Commercial Auto is a line that has seen a lot of problems. And it's very difficult for insurers to kind of catch that tiger by the tail. There's a lot of litigation in there. And you might think attorney involvement is a problem with workers comp. Well, it's it's it's a crisis, and many of the commercial property lines are commercial auto. So I'm fairly optimistic about comp right now, I think we'll have to make sure to monitor that medical trend. Where is it headed? Are we going to go? Are we going to wind up with more medical inflation than we anticipated? You know, many states have decided that they're going to essentially maintain the presumption requirements that came on the books during COVID. Is that, you know, Will that continue to be expanded in some kind of a way? But I think, you know, I think that insurers can build that all into their rates, and I think they'll be fine. So what do we have to be concerned about in Koplow, obviously, pricing, discipline, rate, discipline, underwriting discipline, those kinds of bread and butter sorts of things, that insurers quite frankly, didn't get right for a couple of decades, starting in the 70s, and 80s. And even the 90s when we all never ran underwriting profits, we ran huge underwriting losses, hopefully we make up for it on the investment side, and that eventually is going to catch up with you. You know, we've been talking a long time about ageing workforce, and what the implication that isn't workers comp, but we seem to be managing that pretty well work from home. What does that mean? What is long COVID mean for the industry, but none of these do I see is unmanageable. More generally, these don't necessarily impact comp, but you look at exposures to certain chemicals and so forth, that in the future may, we may find out, wound up wind up being carcinogenic. And we'll have to see how that plays out over time. But right now, nothing truly worrying on on the compromises, in my view. And that's a good thing. Absolutely.
Greg Hamlin:One of the things you mentioned, you talked a little bit about the aging workforce, and that we're managing it. Well. I know right now, over the last maybe 12 months or year and a half, there's been talk about the great reshuffle versus the great resignation. Yeah, it's taken on different names. But we've seen a lot of employees switching out hopping into different companies, early retirements. So there's a lot of movement. And I've seen it with some of my peers as well. What do you think's driving all that change?
Bob Hartwig:Well, you know, the pandemic gave people the view that, that they could work from anywhere for the rest of their lives, which I think was a pretty naive way to perceive what had happened. My view is it was temporary realignment of how many people were going to work. And you see right now that many companies are requiring their workers to be back in their offices, at least some proportion of the time, maybe say three days a week, and there's some flexibility. So that's the new sort of office environment, but I also think that to the extent that the Eventually the economy does weaken, the unemployment rate goes up, guess what, FaceTime is going to matter. You want to be retained, you want to promotion, it's going to be you know, who you see every day and who you talk to every day. And those things are ultimately going to matter. There are going to be some workers and I, even students who are, and I can understand this, that their priority is not on climbing the corporate ladder, it's on maximizing the flexibility during their career, even if it means that they will never rise to the level that someone else who's working hand in hand with the boss or senior management all the time traveling around to meet clients traveling around to facilities and so forth. They're willing to give that up. And that's that's their prerogative. And, you know, from what I can see that the workers comp, ramifications of that do not seem to be something of great concern. Right now, there are concerns of course, people working from home. But quite frankly, the PNC industry is more concerned about the cyber exposure from 1000s of people working at home than they are from the workers comp exposure. So once again, something you might have thought might have been a problem isn't really the kind of problem that we thought it would potentially be. I would also say, and I've said this many occasions, corporations, large corporations have very much stepped up their game when it comes to risk management. If you look at an Amazon, for instance, yep. And Amazon does a lot of things, right. And one of them is risk management. They understand that getting risk management, right is a competitive advantage. And there's a strong positive return on the investments that they make people laughed at Jeff Bezos, when he put out his first quarter 2020 earnings release job. So this is just after COVID began. So it's about eight sometime in April, late April 2020. And he said they were going to spend over $4 billion on risk management, to prevent COVID, from spreading throughout its workplace and so forth. So they were among the first to adopt, you know, mandatory temperature checks and sensors that all workers had to go through, you know, creating programs whereby people would be spread out further and so on. And they've also had innovation since then on other areas, such as, again, preventing musculoskeletal pipe plates, companies like that take huge deductibles, not just in comp, but in their property as well. And so it makes sense for them to make these sort of investments and other companies can kind of learn from what a what companies like Amazon are doing. If, if you are casual about your workers being injured on the job, if you're casual about getting them back to work, you are putting yourself at a disadvantage. In fact, that disadvantage is becoming even more acute in the very tight labor market that we are in unemployment to three and a half percent, you might be able to get somebody to take Joe's place, if he hurts, it's back tomorrow, when it's 6%. When it's three and a half percent, odds are it's going to be much tougher and or much more expensive to do it. So that and I think this is something that sort of falls outside of workers comp, but it's a question that economists should maybe ask or other should ask is, you know, how much of an additional investment in return to work should should employers make given the very tight labor market conditions because the tight labor market conditions suggest that each and every worker who's out is more costly to you than they would have been, say three years ago? Because it just going to be harder for you to plug that gap. And guess what, when Joe gets better, he might leave? So he's more likely to leave? I think that's an interesting question. And I think it's an opportunity for workers comp insurance to say, hey, now's the time to really, you know, we need to redouble our efforts on on return to work right now, because it's more costly than ever, for that worker to be sitting on the sidelines.
Matt Murphy:So Bob, kind of along those lines, I remember a slide you shared a few years ago at IHS might have been two years ago. And basically you were saying the economy is good. Unemployment is low. And you had this phrase to everybody in there. There's never been a better time to quit your job and to look for another job. Yeah, I remember you saying that. And I remember looking around and was there and you still feel the same today? Has that kind of changed? Do you see some storm clouds? Like I don't think the 3.5 unemployment that you expect to persist in the next few years? What are your thoughts along that from the workers perspective?
Bob Hartwig:I'd say if you are quitting because your number one desire in life is to get out of the rat race and go live in a bucolic mountain valley in Idaho and never commute again. You're probably creating a cap in a limit on your on your career. I feel very strongly about that. Very few people are going to be able to be 100% remote live in the middle of nowhere and expect to see the same kind of promotions wage increases opportunity Your responsibilities as most of your co workers and also your, quite frankly, but the eventually you'll I'm sure you're gonna see headlines along this, when it comes to companies laying off people out of sight out of mind, we're going to find out that Mary and Dave who haven't been in the office in three years are going to be the first one's cut. So there, I think there's a lot of self limiting decisions that you can make, on the other hand, with the labor market is tight. And I tell my students, this is that you go out in the labor market, you do a real bang up job, your first couple of years, I usually say, you know, don't leave before two years. But if you've done a really solid job, you could probably move on to another job, don't ever burn any bridges and get a wage increase your overall comp increase the likes of which you never would have gotten by staying at your current company. Now, you don't want to hop every two years necessarily, but after two or three years, someone who's relatively new in the market, but who's turned in a really strong performance there, there are going to be other employers that really want that individual, but again, never burned those bridges. It's not at all impossible that you wind up in a previous employer, even I did that at one point in my career. And that employer was actually NCCI, I had two stints with them, and I still work with them on other matters to this day. So so if you are going to jump ship, make sure that that you are in a very strong position to do it, that you've had, you've made a solid mark on the company where you are right now and that that you are moving because the next employer really wants you and think thinks it's going to be a great fit. And then make sure that when you leave on the when you leave, when you leave that leave on terms that your old employer would want to hire you back. So I think there are there are different reasons for jumping ship this day and age, they're just more people than ever again, I think that there's some naivete in this. But many people claim that they want to have a greater work life balance. And these, you know, I can respect that. But that will come at a cost in many cases to the career because there you know, I There are going to be individuals who are given 110% and who are doing the bidding of senior management in a way that simply will not be feasible in a purely remote environment or feasible for people who are making a hook or changing jobs purely for lifestyle reasons.
Greg Hamlin:And those are some excellent, excellent points. And I think it's a really good insight to remember that the FaceTime does matter. And those relationships matter when you're thinking about the longevity if you're looking to grow into different levels of your career. So I think, great insight on that. One of the questions, you know, not all of our listeners probably have the financial background in worker's comp, and I thought it might be helpful, Bob, if you could just explain work comp ratio, the simple explanation and compare. You talked about us being in the 80s? Why does that matter compared to times when we've been over 100?
Bob Hartwig:Yeah, so you know, the the most visible statistic within PNC insurance world is the combined ratio. So just very, very simply, that's the ratio of what the insurer pays out relative to the premium that it takes in and includes the losses and the expenses that are paid out. And, you know, nowadays, as we were mentioning the combined ratio, and workers comp is in recent years, it's been 8586 87. So getting that insurance paying on loss and expense, 8586 87 cents on the dollar, relative to what they take in, if we went back to the early 1970s, the combined ratio was in the neighborhood of 100 500 607. But it actually improved for better we've been a hard market ensued, and the numbers improved and we actually had by 1981 82, a combined ratio of about 9596. Not a terrible number, but that really deteriorated rapidly. And so by the time we got to 1986, the combined ratio was 121. Oh my gosh. Okay. And in fact, those ratios remain high pretty much for a decade. Yeah, well above 100 into the one teens. And when I came into the business in early, it's a 1993. The numbers were very poor, and residual markets. The markets of last resort accounted for almost a quarter of the entire PNC market in terms of premium revenue today, it's it's 1% or 2%. It's a very small number. It used to be something that NCCI talked about and it was their number one concern most of the time and now they kind of blow past a very brief discussion. These residual markets are very, very be small, there were a lot of reforms during that period of time, which were helpful and other things. But that said, things improve for a while. But by the time we got back to around 2010 or so the combined ratio was 100 110 100, and letter. So that sort of sparked a hard market in comp along with some additional reforms. And that brought the combined ratio back down to roughly where it is today, well below 90. And we've had a good stretch of strongest numbers, I think, the combined ratio of 85 or so in, in 2019, before COVID was the lowest that we could trace back, which goes back to like the 1930s. So these are some of the best numbers we've ever seen. They're certainly the best numbers that anybody in the company has three who's activated today, as has ever seen, and hopefully will be I, again, I'm a little skeptical with keep it at 80 by 288, somewhere around there, but still even work for in the 90, low 90s. That's still not not a bad number. So again, from a cop perspective, overall, the numbers today are just no comparison. They are even the best year in the early 90s was about a 95 combined ratio, we're well, better. We're better than that today. And we're 30 points better than we were, say, in the mid 1980s.
Matt Murphy:I wonder if you could shed a little light on, you know, with inflation, we've got Powell trying to fend it off and increasing interest rates, specifically for insurers an increase in interest rates being that we're in a lot of fixed income securities, this can be a good thing for us, maybe talk about this impacted, you know, especially with respect to comp, which can be known as a long tail line.
Bob Hartwig:So, one headwind p&c insurers have had faced and particularly long tail, in particularly long term lines like comp and areas like medical professional liability and so forth. The headwind is that interest rates have been falling, or had been dropped to near zero since the financial crisis began back in 2008. And were left that way for the better part of a decade. And so if you look at what the return on the industry's investment portfolio has been, it basically was moving steady, steadily downward. So that actually the most recent full year results that we have 2021 show that the return on the industry's portfolio was the lowest it had been as far back as we have data, which go back 61 years. Okay, so that's been a negative for insurers. So the current uptick in interest rates is something that hopefully provides a bit of a tailwind for insurers. Now, it doesn't happen instantaneously, the bonds that are sitting in our portfolio don't suddenly generate a higher interest rate. It's only when they mature and you have new dollars to invest, that you can take advantage of that. So this is kind of like turning around the Queen Mary, it's going to take years now the thing is, is it's not likely that the increase in interest rates is going to persist for years, the downward trend in interest rate persisted for a decade, the upward trend will will probably reach peak in the first quarter of next year, in terms of interest rates, and some of the Fed is expected to sort of sit back and say, Okay, we might have pushed rates as high as they need to go, we're achieving what we need to achieve in terms of inflation. And we'll hold there probably briefly, and the expectation is by the second half of 2023, we'll begin to actually move rates model downward in measured steps. So don't expect a long, persistent substantial tailwind from higher interest rates. Now, insurers should probably try to do what they can to take advantage of these. But there's only so much you can do it during a period during this period of time. So the good news is that we'll probably move off at 61 year low in terms of the return on investment on fixed income investments, but it'll be kind of a temporary respite for relatively low interest rates. And I think, again, we may not get the interest rates as low as they were prior to COVID. But they'll be still much, much lower than they were decades ago or even 15 years ago. And that has the effect in the PNC insurance world of reinforcing the need to be disciplined for underwriting purposes. You just don't have the kind of cash flow coming in from your investments that you would if interest rates were to go 10%, something like that. That's just not going to happen. So I was originally concerned that if interest rates were to go, you know skyward that insurers would potentially lose discipline as a result of that, but I don't see interest rates a going is high enough to do that or be high to be high long enough. to sort of get management to think about what the new normal is high interest rates, let's throw underwriting discipline down the rat hole like we did in the 80s. And we're going to rely on investment. And I just I don't see any sentiment towards that.
Greg Hamlin:Great insight. Great insight. Well, Bob, I really have enjoyed chatting with you. I know, both Matt and I have always enjoyed your presentations at AIA s and feel like you offer a lot of insight when it comes to workers comp and the economy. One of the things that that I wanted to do in this season of adjusted was to let people share their favorite part of what they do each day. Because obviously, we all have parts of what we do that we love and parts of the love less. But I thought it would be great just to hear like, what keeps you going or what do you love about what you do every day, Bob?
Bob Hartwig:Well, you know, part of the reason I came here to the University of South Carolina, in fact, the major reason is, is I always said to myself, I wanted to go into the academic world, and because that's what I really planned on doing when I did a PhD. But there were many private sector alternatives that were very attractive, and quite frankly, more lucrative, right. But what I really like is working with students, and I work mostly with juniors and seniors who are thinking seriously about what they want to do the rest of their lives. And you know, in the classroom, you can almost literally see light bulbs go off in students heads. Now you see how fat people are familiar with my presentations, I go fast and a lot of information, a lot of data, imagine getting subjected to that three times a week. And so it's kind of I do produce a lot of slides in my class, I go through a lot of material, if there's a book, I'm going to get to every chapter, I'm making sure that they they in their parents are getting a good return on their investment, maybe they don't always see it that way. But that's how I see it. And then ultimately, where all of that culminates is watching my students get a good internship, a good job, or, or get admitted to graduate school, one of those sorts of things, and I, I asked all of them to follow me on LinkedIn, for instance. And so I can keep track of what they are doing, I can see if they got a promotion, just just this week, I've seen three or four of my past students who graduated a few years ago, get a promotion, and in in a variety of areas, most are still in the insurance world, you know, some have gone off to become lawyers and things like that. I just got a note today once become an assistant attorney general in, in Georgia. So you know, that's interesting. And hopefully, he'll be prosecuting insurance crimes. So that's, that's my, that's my hope. At any rate, I've had students go off again, you know, do all kinds of great things. Again, I've only been here six years. But you know, I ask students every year to go off, you know, from A to Z, they'll go everywhere, from you know, AIG to Zurich, I had a student even go to zoom last year. So those are things I hadn't even heard about when I came. So it gives me a great deal of pride to see those students succeeding their parents be happy with them, their families, be proud of them. And then when I get feedback from the employers, it's like, you know, Mary's doing such a great job for us. And I might start up there's some companies here that didn't recruit here at all, when I came, I get one student in the door, then they come back for to the next year in three the next year, increasingly getting a lot of students into the specialty line space. For instance, that's something students into into reinsurance, which is something of course they've never even heard of, before they sitting in my class, and the average person's never heard of reinsurance. But when they hear about the concept, Oh, wow. So seeing those students learn, and then being able to capitalize on that, being able to take what they learned in the classroom and convert that with good skills, to be able to convert that into an internship, and then to a job to be kind of, you know, productive citizens that you and I would all be proud of no matter what you hear about the younger generation, I will tell you, there's a lot of phenomenal, hardworking people out there today who know there's more to life, the tick tock.
Greg Hamlin:That's fantastic. I couldn't agree more. I'm a huge, huge fan of the importance of education. I started my career in nonprofit fundraising for a university. And so I really believe in that and love hearing how you're changing people's lives that way. Well, again, want to thank you for joining us for this episode. And, of course, I appreciate the time that you spent with us and just want to remind our listeners to do right think differently, and don't forget to care. And that's it for this episode of adjusted. Thanks, everybody.