Last year marked a reversal of a six-year trend of deteriorating results for the workers’ compensation insurance sector as the market posted a significant improvement in underwriting performance, but overall results are still unsatisfactory, according to a Fitch Ratings report.
A trend of rapidly increasing prices and more conservative underwriting practices fostered this turnaround as the calendar-year combined ratio improved to 110 percent from 122 percent in 2001, according to reports by the National Council of Compensation Insurance Inc. (NCCI). This represented the lowest calendar-year combined ratio since 1999.
While losses related to the tragic events of Sept. 11, 2001, contributed to the poor results in 2001, the key element behind the market’s poor performance continues to be inadequate pricing from the late 1990s forward. Current results indicate that pricing, though improved, is still insufficient to produce adequate returns on capital. Encouragingly, rates have continued to show positive momentum in the first half of 2003. However, these rate increases are offset somewhat by continued rising loss-cost trends.
Fitch Ratings believes that many workers’ compensation insurers will face challenges in producing strong operating results as the magnitude of underpricing in previous periods business continues to be revealed through adverse reserve development. Also, with interest rates approaching 45-year lows and an uncertain economic environment, investment results are not likely to provide a boost to profitability in the near term, increasing the imperative for insurers to produce underwriting profits.
Fitch believes that accident-year and calendar-year underwriting performance will continue to improve in 2003, barring any unusually large catastrophe losses. The current hard market for workers’ compensation pricing is likely to maintain momentum over the near term due to the extensive recent withdrawal of underwriting capacity in the workers’ compensation market from insolvencies and market exits from unprofitable participants. However, considerable uncertainty remains whether the market will achieve a broad level of rate adequacy for a sustained period in which market participants produce reasonable profits and also restore loss-reserve adequacy.
The report, “Workers’ Compensation Insurance—Not Quite There Yet,” can be accessed at Fitch’s Web site.
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