Workers’ Comp Profits at Risk from Growing Competition, Lower Rates: A.M. Best

Workers’ compensation carriers’ ability to retain profitable accounts and maintain market share could be challenged due to declining rates and growing competition in the U.S., according to an A.M. Best report.

Rate decreases across the United States have led to margin compression in this segment, says the Best’s report, “Declining Rates Could Threaten Profitability of U.S. Workers’ Compensation Line.” As rate levels continue to decline, competitive pressure could mount on workers’ compensation specialists to the point that it will adversely affect not only company income statements, but also balance sheets, especially if companies are unable to set aside adequate capital for loss reserves, the firm’s analysts contend.

Meanwhile, the profitability of the workers’ compensation line remains strong, despite extended market softening, as low reported claims frequency, legislative reforms, more effective use of data and predictive analytics and enhanced workplace safety measures drive positive operating results.

Insurers in the workers’ compensation segment reported an 86.1% combined ratio in 2018, compared with 92.1% in the previous year; however, on a direct basis, loss ratios are deteriorating in 2019 compared with 2018.

A.M. Best said it is concerned about reserve adequacy, noting that with the consistent rate decline since 2015, the adequacy of claims reserves in the long term remains uncertain. Additionally, while lost-time claims frequency continues to decline, claims severity continues to rise, driven to a large degree by injuries workers have suffered in motor vehicle crashes.

A.M. Best also analyzes the business through its Workers’ Compensation Composite (WCC), which is composed of U.S. companies, including state funds, with workers’ compensation and excess workers’ compensation net premiums of 50% or more of their total net premiums. This analysis finds that as some of the larger writers have decreased their exposure to the workers’ compensation business, specialist writers, included in the WCC, have assumed this business.

The WCC accounted for 51.7% of U.S. workers’ compensation net premiums compared with 33.8% in 2010. The WCC reported $4.6 billion in net income in 2018, a 12.2% year-over-year increase. Through the first half of 2019, the WCC has generated approximately $2.1 billion in net income.

A.M. Best currently maintains a stable market segment outlook on the U.S. workers’ compensation industry, the largest component of the U.S. commercial lines segment.

But it cautions that despite the positive results across the segment, aggregate direct premiums written have decreased modestly due to the declining rates. Also, while unemployment remains low, spikes in unemployment typically follow long unemployment rate declines and payroll growth may plateau. Consequently, the report warns, any resulting premium growth may dissipate sooner rather than later unless wage growth accelerates.

A recent report from Fitch also forecast a dimmer outlook for workers’ compensation than for other lines, noting that workers’ comp rates have declined for almost five consecutive years.

Topics USA Profit Loss Workers' Compensation AM Best