Fitch Reports Continued Challenges in Workers’ Comp Market

August 7, 2002

A new report published by Fitch Ratings states that the workers’ compensation market continues to face challenges following further deterioration in underwriting performance in 2001.

Despite significant pricing improvements in a majority of states, the workers’ comp combined ratio increased to 121 percent in 2001 from 118 percent in 2000, marking the sixth consecutive year of deteriorating underwriting performance.

“The unexpected losses related to the events of September 11 were a contributing factor behind the poor performance,” James Auden, senior director, Fitch Ratings, commented. “However, the key factor continues to be that workers’ compensation pricing market wide was inadequate from the late 1990s through 2001, despite a recent trend of rate increases.”

While market pricing is dramatically improving in workers’ comp in nearly all states, the rate increases are offset somewhat by continued rising trends in claims severity and sharp increases in reinsurance costs for primary carriers. Creating further challenges, reinsurance market terms and conditions have also shifted unfavorably for primary carriers, particularly with the widespread use of terrorism exclusions in renewing treaties.

“Workers’ compensation insurers will continue to face challenges in producing operating results that correspond with an adequate return on capital as the magnitude of under pricing in previous periods of business will continue to be revealed through adverse reserve development,” Auden added.

Fitch believes that the current hardening market for workers’ comp pricing will maintain momentum over the near term.

However, there remains uncertainty that the industry will get to a broad level of rate adequacy and maintain that position for a sustained period in which market participants can produce reasonable profits while also restoring loss reserve adequacy.

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