The workers’ compensation market is on track for a fifth consecutive year of underwriting profits in 2019 despite recent weakening in market fundamentals.
According to a Fitch Ratings report, the industry’s statutory combined ratio fell to 86% in 2018, and has averaged 93% annually since 2015.
Over the past five years most large underwriters posted favorable underwriting profits in the workers’ compensation segment. Berkshire Hathaway and Chubb were leading performers with the lowest five year average segment combined ratios.
In 2018 positive results were partly driven by recognition of greater reserve redundancies, which totaled approximately 15% of segment earned premiums. Fitch’s analysis shows conservatism in loss reporting for recent accident years portends continued segment favorable reserve development in the future, but at a lower magnitude than recent figures.
Fitch now questions how long the good news will last.
“The workers’ compensation segment is known for past periods of volatility, but recent experience represents an unprecedented level of underwriting success,” says Gerry Glombicki, director of Insurance at Fitch Ratings. “However, all good things eventually come to an end, and these favorable underwriting profits are not sustainable in the long term in light of competitive forces, recent price deterioration and potential for future claims trend deterioration.”
Fitch noted that recent regulatory rate filings show underwriters are reducing prices in nearly all states, while data from the Council of Insurance Agents and Brokers show workers’ compensation renewal rates have declined for the last 17 consecutive quarters.
Several factors can promote a sudden deterioration in performance including an increase in claims frequency or severity along with new regulatory developments in key states, according to Fitch analysts. These issues are not a near term threat but bear close monitoring, Fitch warned.
Fitch said it maintains a stable sector outlook for U.S. commercial lines insurers based on solid market fundamentals and capital adequacy measures that can withstand significant adversity in future performance. For several insurers, strength in the workers’ compensation segment offsets recent weaker results in other lines.
The report is titled, “U.S. Workers’ Compensation Market Update – Fifth Consecutive Year of Underwriting Profits Projected for 2019.”
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