This will be brief. For those of you who follow the insurance industry, this will not come as a surprise. However, for the casual reader, this may be a shock. Atlantic Mutual – founded in 1838, once the largest marine and general insurance company in the US, was put into receivership (shut down by the insurance department due to insolvency). The once storied firm was one of the carriers who insured the Titanic – yes, that Titanic. Despite the loss, it survived. It even made it through the Great Depression. So what happened?
First, the company extended itself beyond its core competency. Then it sold off profitable businesses to shore up its finances leaving it with the workers’ compensation business. It must be noted that insurance is a highly political game, especially workers’ compensation.
The insurance department regulates the rates charged by insurance companies. Insurance commissioners are either appointed by state governors or entities controlled by governors. There are, however, 11 commissioners nationwide that are elected directly by the public. Motivated by agendas to fulfill, commissioners tend to do what is “politically acceptable” rather than what is “economically rational” or prudent from a business standpoint. Case in point: in 2007, New York reduced workers’ compensation rates by over 20% with much fanfare. In addition, the Solons in Albany increased the benefits received by the injured workers. We all know what happened next – the Great Recession.
That brings me back to Atlantic Mutual. Workers’ compensation premiums – the “revenue or sales” of an insurer are based on the number of workers, pay of those workers and, indirectly, the hours worked. As the unemployment rate doubled from 5% to 10%, those premiums declined drastically. Not to mention, the spread of risks being insured (ie. the employees) was over a much smaller pool. Secondly, workers’ compensation is also prone to fraud. During recessions, fraud increases as injured workers seek to continue payments rather than go back to work (which may or may not be there for them). On the expense side of the ledger, medical costs have increased. So, not only did the amount of benefits increase by political decree, but the cost of those benefits also rose. A veritable one-two knock out punch.
While it is always sad to see institutions with such long histories fall, I’m not surprised. The writing was on the wall. Sure, management is partly to blame for moving away from their strengths. But those moves alone did not put the company under. Unless something is changed, other workers’ compensation firms are likely to go under or face significant hardships.