The workers’ compensation market is seeing encouraging signs. Premiums grew for the second consecutive year, the combined ratio declined and claim frequency continued to improve at a pace slightly greater than its long-term historic rate of decline.
In 2012, the workers’ comp calendar combined ratio dropped six points from 2011, coming it at 109. The drop in combined ratio marks the first decrease since 2006, according to the State of the Line workers ‘compensation market analysis published by NCCI.
“By many measures, the industry condition is indeed improving,” said NCCI President and CEO Steve Klingel. “While we are pleased to see that the positives are beginning to outweigh the negatives, there remains great opportunity for improvement.”
Long-term challenges still linger over the future of workers’ comp, says Klingel. External forces such as the economy, healthcare reform, and new legislation could still negatively affect the market. “But for now, we view the overall industry condition as encouraging,” he says.
According to the State of the Line report, the workers’ compensation calendar year combined ratio for private carriers was 109 for 2012.
The accident year combined ratio experienced a similar six-point improvement. NCCI estimates that the accident year combined ratio for 2012 is 108, following 114 in 2011.
Net written premium (including state funds) also improved, increasing to $39.63 billion in 2012. The NCCI reports this is a 9 percent increase from 2011. Net written premiums increased 8 percent in 2011. The premium increases follow a cumulative 27 percent decline in premium from 2006–2010.
The report also revealed that lost-time claim frequency improved significantly in 2012 — down 5 percent on average in NCCI states. The 5 percent decline is slightly larger than NCCI’s long-term annual estimate of a of 2 to 4 percent decline per year. Previous NCCI research indicated that distortions in the calendar year premium data resulting from the recession and subsequent recovery affected our measure of claim frequency for 2010 and 2011. Current research indicates that those distortions are no longer significant for 2012.
Despite the improving conditions, the workers’ compensation line continues to deal with a variety of significant challenges, says NCCI Chief Actuary Dennis Mealy.
“These include poor underwriting results, low investment yields, and continued uncertainty regarding the impact of the implementation of the federal healthcare reform bill,” he said.
Even so, the fact that the industry is seeing a return to a long-term pattern of declines in frequency and premiums are on the rise suggests that the underwriting performance of the industry, while still not good, is not as bad as it has been over the last two to three years, says NCCI’s Chief Economist Harry Shuford.
“For the last three years the operating gain, which basically measures the overall profitability in workers’ compensation, has basically been zero for three years in a row,” Shuford said. “Investment income has been just sufficient enough to cover underwriting losses and there was nothing left over. This year there is some positive return due primarily from the improvement in underwriting results.”
Like Mealy, Shuford told Insurance Journal that he sees investment yields as a concern for the future health of the workers’ comp market.
“With this period of the last five or six years of very low interest rates, the industry has been able to maintain their investment income but we are concerned about what happens as they (insurers) start replacing maturing securities, particularly bonds that had high interest rates when they bought them, and they have to place them at much lower interest rates that are currently available,” Shuford said.
“We are concerned we are going to see downward pressure on investment income over the next two to three years in the insurance industry, particularly if the Federal Reserve has to continue this aggressive monetary policy because of the slow recovery.” This challenge is “sort of the wild card,” he says.
“If that happens, I think I would see even more premium increases, tighter underwriting and continued growth in the residual market,” Shuford said.
Other market indicators/trends highlighted in NCCI’s 2011 State of the Line report:
- The impact on premium of changes to bureau loss cost/rate filings was about 2 percent in NCCI states for 2012. For 2013, the impact of bureau loss cost/rate filings is basically flat in NCCI states. In the last filing cycle, NCCI filed 25 increases and 13 decreases, mostly for effective dates in 2013. Carrier discounting from bureau loss costs and rates declined about 2.5 percent in 2012 in NCCI states. About 40 percent of the increase in premiums in 2012 can be attributed to increases in bureau loss costs and rates, and the decline in carrier discounting.
- The private carrier reserve position continued to deteriorate in 2012 for the fifth consecutive year. NCCI’s estimate of the reserve position for the private carriers as of Year-End 2012 is a $13 billion deficiency.
- Investment returns for the workers’ compensation line remained strong. For the third consecutive year, the ratio of investment gains on insurance transactions to premium was at or above 14 percent.
- Investment results combined with underwriting results produced a workers’ compensation pretax operating gain of 5 percent for 2012. This is in-line with the industry’s long-term average, and an improvement following three years of near-zero operating gains or losses.
- In NCCI states, the average indemnity cost per lost-time claim increased a modest 1 percent in 2012, after increasing 2 percent in 2011 and declining 3 percent in 2010.
- The average medical cost per lost-time claim increased by 3 percent in 2012 after increasing 3.6 percent in 2011 and increasing 1.4 percent in 2010. Combined, the total lost-time claim cost increased about 2 percent in 2012, which is about the same rate as the change in average wages.
- The workers’ compensation residual market experienced significant growth in 2012. Premiums grew by close to 50 percent, and the average market share in the residual market increased from 5 percent to 7 percent. The pace of growth is continuing into the first quarter of 2013.
- Although the volume of business in the residual market is growing as the market tightens, the combined ratio actually improved from 117 in Policy Year 2011 to 112 in 2012. The total underwriting loss in the residual market pools serviced by NCCI was $99 million for Policy Year 2012, up slightly from the $85 million in 2011.
In 2012, the workers’ compensation line showed some signs of recovery. Results improved materially, including the following:
- The combined ratio for workers’ compensation improved for the first time since 2006
- Premium grew for the second consecutive year
- Claim frequency declined significantly for the first time since 2009
- Claim severity increases remained modest
- Even with the improvements, workers compensation is faced with some ongoing challenges:
- The combined ratio, while lower, still remains too high
- Slow growth in employment, particularly in the manufacturing and construction industries, is impeding additional premium growth
- In addition, the impact of the implementation of the Patient Protection and Affordable Care Act in 2014 looms as a huge uncertainty for the line
The entire NCCI State of the Line presentation can be found at ncci.com.