Report: Workers’ Comp Line Deteriorates Further in 2010

May 5, 2011

Workers’ compensation continued to worsen in 2010 as the combined ratio jumped five points to 115 in 2010 from 2009.

In its State of the Line workers compensation market analysis, NCCI Holdings Inc. described the workers’ compensation line of business as “deteriorating” adding the workers’ comp industry faces many hurdles in the future.

“In 2010, NCCI defined the state of the workers compensation industry as ‘precarious’ based on considerable uncertainty about where the market was headed,” said NCCI President and CEO Steve Klingel. “Unfortunately, that uncertainty has, to a large extent, been resolved — and not in a positive direction.”

Klingel says there continues to be ongoing deterioration in market fundamentals. “Today, the workers compensation industry faces a number of difficulties that will confront market stakeholders in the weeks and months to come.”

Those difficulties include poor underwriting results, declining premiums, healthcare reform uncertainty, and, now, an uptick in claim frequency, added NCCI Chief Actuary Dennis Mealy.

The NCCI report listed the workers’ compensation calendar year combined ratio for private carriers at 115 in 2010, up 5 points from 2009. However, 3 points of the increase in combined ratio again this year was due to one carrier adding more than $800 million to excess workers’ compensation reserves. This is the second straight year of significant excess reserve strengthening, the report said.

One good sign is that the recovering economy has helped slow the premium declines in workers’ comp for private carriers that had been experienced from 2007–2009.

For 2010, net written premium for workers’ compensation private carriers declined just 1.3 percent — a much smaller decline than the prior two years. From 2007 to 2009, the workers’ compensation premium declined a total of 20 percent, the NCCI reported.

Other market indicators/trends highlighted in the report include:

• The 2010 Accident Year combined ratio is 114, also up 5 points from 109 for Accident Year 2009.

• Workers’ compensation prices continued to drift down in many jurisdictions. However, NCCI did file 14 increases in loss costs/rates in the 2010/2011 filing cycle, up from 8 increases the previous cycle.

• NCCI estimates that the reserve position of private carriers continued its recent pattern of modest deterioration in 2010. The reserve deficiency is now estimated to be $10 billion at year-end 2010, up $1 billion from year-end 2009. After consideration of the allowable discounting of the indemnity reserves for lifetime pension cases, the reserve position remains a relatively slight inadequacy of about $5 billion, on a total carried reserve base of more than $109 billion.

• The decline in lost-time claim frequency stopped in 2010. The usual measure of the frequency change indicates a significant increase of 9 percent. However, NCCI research indicates that several distortions in the data, due to the recession and subsequent recovery, are significantly increasing the change. Once those distortions are accounted for, frequency is up 3 percent.

• The average medical cost per lost-time claim increased 2 percent in 2010. This is the smallest increase in medical cost since 1993. The average medical cost change is also likely influenced by the influx of small lost-time claims.

• NCCI estimates that the cost of the indemnity portion of lost-time claims was 3% lower in 2010. This is the first actual decrease in indemnity claim cost since 1993, which was in the era of the big reform efforts in the early 1990s. As with medical cost (above) the change is influenced by the influx of small lost time clams.

• It’s important to note that the small change in average severity of lost-time claims in 2010 is likely an aberration. It is likely caused by a temporary influx of medical only claims becoming smaller loss time claims as the recovery firms and does not reflect an underlying reduction in medical and indemnity cost drivers.

• The combined ratio of the residual market pools increased a bit to 120 in 2010 after several years of being in the 111–115 range. At this point in time, the pools are quite small, so individual state losses can have a disproportionate impact on the combined ratio.

• Depopulation of the residual market did continue, however, albeit at a slower pace than in recent years. Premiums dropped another 20 percent in 2010 and are now approximately $400 million. Overall, the market share of the residual market pools serviced by NCCI for 2010 held steady at about 5 percent. The current policy year underwriting loss is about $88 million — slightly higher than the $74 million in 2009.

• Investment gains for the insurance industry did rebound in 2010 — though investment yields remain at historically low levels. This is true both for the total property/casualty industry and for the investment gains associated with workers’ compensation insurance transactions. In both cases, some of the increase was due to rebounding realized gains, which went from a realized loss of $8 billion to a gain of about $6 billion. However, the industry will not be able to maintain this level of investment gains without increases in interest rates.

• Although the investment gain is improved, the line showed deterioration in bottom line results after investment income. Workers; compensation private carriers posted a pre-tax operating loss of 1 percent. This is the first pre-tax operating loss for the line since 2002, and the worst result since 2001.

The NCCI says it will continue to monitor deteriorating underwriting results, claims frequency, the federal regulatory environment, and the situation on healthcare reform.

With investment yields at historic lows, the current levels of underwriting losses are not sustainable, the report said. Even with what appears to be a temporary increase in investment gains, the combined ratio will need to decline substantially to earn a reasonable return on capital.

The NCCI also noted that although the impact on the loss ratio from the increase in frequency is moderated by a year of no severity increase, it is unclear whether this frequency increase is a “new normal” or a one- or two-year phenomenon coming on the heels of the “great recession.”

The entire NCCI State of the Line presentation can be found at www.ncci.com.

Source: NCCI Holdings Inc.

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