Workers’ compensation insurers are managing their premiums dollars better than they have in years, but those premium dollars are stagnating even as employment and wages are rising.
In 2017, for the fourth consecutive year they posted an underwriting gain — including an unprecedented combined ratio of 89 that is the lowest in the industry’s history, according to the National Council on Compensation Insurance’s (NCCI) annual State of the Line Report released in May 2018. At the same time, total market workers’ compensation net written premium volume, which includes both state workers’ comp funds and private carriers, declined slightly in 2017 to $45 billion from $45.6 billion in 2016.
In 2017, net written premium for just private carriers also dropped slightly to $39.8 billion from $40.1 billion in 2016. The workers’ compensation underwriting gain for private carriers is approximately $4.1 billion for calendar year 2017.
According to NCCI, the good news in payroll growth has been offset by loss cost decreases and the inability of carriers to raise their rates.
NCCI Chief Actuary Kathy Antonello said the best news was a historically low loss ratio of 49 that was the major contributor to the good underwriting performance. “It’s clear that private carriers are supporting conscientious underwriting while interest rates remain low,” she said.
On an accident-year basis, the industry reported the 2017 workers’ compensation combined ratio at 99 percent, and NCCI expects this to develop favorably as well.
Antonello stated in the report that analysts would have to look back decades — as early as the 1940s and 1950s — to find a sub-90 combined ratio for workers’ compensation.
Workers’ compensation was the only line of property/casualty insurance to experience a decrease in total net written premium for 2017, which fell 0.7 percent overall.
According to NCCI’s Antonello, there have been four main forces behind the stagnation in premiums: more premium ceded to the reinsurance marketplace; continued use of offshore cessions; payroll growth that’s been offset by loss cost decreases; and little to no change in carriers’ pricing levels.
Payroll increased by 4.4 percent in NCCI states from 2016 to 2017 but that change was almost completely offset by a 4.2 percent decrease in loss cost and the change in mix of business, Antonello said. This trend was found in every NCCI state.
One of the four forces behind little movement in premium — the offshore picture — may be changing.
The use of offshore cessions, which decreases net written premium in statutory accounting, could change as the corporate tax rate drops from 35 percent to about 21 percent and the new Base Erosion and Anti-Abuse Tax, known as BEAT, significantly reduces the longstanding tax advantage that offshore entities held over those in the U.S., she said.
“Transferring to offshore isn’t going to look as attractive in the future and that may put an end to some of this trend,” Antonello said. Therefore, if less premium is ceded to offshore reinsurers in the future that is going to have an impact on net written premium for the line, she added. For now, it’s a substantial portion of the overall premium. Antonello explained that in 2011, workers’ compensation premium ceded to offshore reinsurers stood at about 24 percent. However, by 2017 that portion of the market stood at 32 percent. Ceded increased on average about 11 percent per year while direct written premium and assumed [premium] increased at only about 6 percent per year, she said.
Not All States
Between 2016 and 2017, nationwide private carrier direct written premium showed a slight increase of 0.1 percent. However, Antonello said there was considerable variation in direct written premium growth across states.
The standout state was Florida, where direct written premium (DWP) increased by about 15 percent in 2017, Antonello said. That was a result of the 14.5 percent increase in Florida in October 2016 that addressed the projected impact of the two court decisions, Castellanos v. Next Door Company, et al., and Westphal v. City of St. Petersburg. (Since the October 2016 increase, Florida has approved two decreases of 9.5 percent and 1.8 percent.)
Despite nationwide premiums remaining flat overall, 19 states showed increases in workers’ comp direct written premium in 2017 ranging from less than 1 percent growth in Maryland (0.3 percent), California (0.5 percent), Utah (0.6 percent), Virginia (0.8 percent) and Oregon (0.9 percent), to increases of more than 5 percent in Rhode Island (5.1 percent), Georgia (5.2 percent), South Carolina (5.7 percent), New York (6.3 percent), Delaware (7.5 percent), Idaho (10.7 percent), the District of Columbia (11.4 percent), and Florida (15 percent).
However, the drop in direct written premium for the remaining 28 states (not including monopolistic states) led to the overall national stagnancy for workers’ comp premiums in 2017. States with the largest declines in premium included Oklahoma (-6.6 percent); Minnesota (-6.4 percent); and New Hampshire, Connecticut and Arkansas (all -6.3 percent).
But if the premium results are translated into a proportion of states’ workers’ comp premium, it’s quite a different picture, said Antonello. Premiums in California’s quite large workers’ comp market remained even. According to the WCIRB of California, payroll increases have been offset by decreases in pure premiums over the last couple of years. New York, where an October 2016 rate increase contributed to growth in the market, just filed for an 11.7 percent decrease in May 2018.
While it remains to be seen how payroll and other factors will ultimately affect workers’ compensation premiums in 2018, NCCI filings approved this year, as of May 10, 2018, call for rate decreases to continue. Antonello said that as of May, premium levels under filings in 2018 will drop the premium level by 9.6 percent overall due to significant and anticipated decreases prevalent across almost all NCCI states.
“The pattern is clear and it’s consistent with what we saw last year,” she said. “Continued decreases in claim frequency along with a moderation in severity are putting downward pressure on medical and indemnity trends and that’s contributing to the decreases.”
According to the latest CIAB pricing survey, the percentage of respondents seeing pricing increases at renewal for workers’ comp is pretty stable — it was 13 percent in Q4 2016 to 12 percent in Q4 2017, Antonello noted. “As of the fourth quarter of 2017 agents are reporting seeing mostly decreases or no change in prices at renewal.”
The residual workers’ compensation market has also been holding steady, hovering around $1 billion since 2103. “Assigned risk rates are seeing the same significant decreases as is the voluntary workers’ comp market and that’s one reason why premium is down,” she said.
One premium range category in the residual market has grown — the $0 to $2,499 premium range experienced a 9 percent growth in 2017. All other premium categories declined from Q1 2017 to Q1 2018, NCCI reported. Premiums over $100,000 fell by about 24 percent during this time in the residual market.
Overall, the residual market share of the total workers’ comp market has been stable at about 9 percent since 2013.
Antonello noted that even in the most volatile class codes that might not find coverage through the voluntary market are stable in workers’ comp. These include carpentry, roofing, local trucking, painting and long-haul trucking, which together made up 24 percent of the workers’ comp residual market in 2017.
Other trends highlighted in NCCI’s 2018 State of the Line were:
- Average lost-time claim frequency across NCCI states declined by 6 percent in 2017, on a preliminary basis.
- In NCCI states, the preliminary 2017 average indemnity and medical accident-year claim severities both increased by 4 percent.
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