Workers’ Compensation Is Doing Well. Is It Time to Worry?

By | January 24, 2020

“As rate levels continue to decline, competitive pressure could mount on [workers’ comp] specialists to the point that will adversely affect not only company income statements, but balance sheets as well, especially if companies are unable to set aside adequate capital for loss reserves,” A.M. Best analysts wrote in Best’s Market Segment Report, “Declining Rates Could Threaten Profitability of U.S. Workers’ Compensation Line,” published in late December.

The 26-page report sets forth historical workers’ comp results through 2018 for the industry overall (with some estimates for 2019, and also for workers’ comp specialists (including and excluding state funds) and for state funds alone.

There has been continued good news for the line. Not only is the line profitable—with a combined ratio of 86.1 for the latest full year available, 2018—but also that as the biggest component of commercial lines segment insurance overall, workers’ comp is fueling a continued stable outlook for the entire segment. A.M. Best’s outlook for workers’ comp, by itself, is stable and the “line’s favorable underwriting performance has helped offset the negative effects of other lines on the commercial lines’ overall performance,” the report says.

The 86.1 combined ratio was down nearly 6.0 points from 2017 and 15.5 points from 2014, the earliest year shown in the report. That 2018 result compares more favorably to results going back further than 2014, the report says, without projecting any estimates for 2019 or 2020.

In spite of declining premium rates in recent years, workers’ comp net premiums written rose 7.4 percent across the industry in 2018—marking the highest growth rate in the five years through 2018.

A robust jobs market and higher payrolls offset the insurance price drops, according to A.M. Best analysts. The opposing forces of competitive insurance prices and higher payrolls just about offset each other, keeping direct premiums relatively flat in 2018 (with a 0.4 percent decline recorded). Net premiums still rose, however, because, A.M. Best said, carriers retained more of their workers’ comp premium rather than ceding it to external reinsurers.

In addition to the good U.S. jobs market, the report identifies key factors contributing to favorable underwriting results include:

  • Low reported claims frequency
  • Legislative reforms
  • More effective use of data and predictive analytics
  • Enhanced workplace safety measures

Potential negatives for the years ahead include:

  • Medical cost inflation
  • Diminishing prior accident-year loss reserve redundancies
  • Higher average settlements

According to the report, medical cost inflation has not boosted loss severity to the point where it more than offsets declining claims frequency—yet.

The report also notes that “any material weakening in the U.S. economy could lead to an adverse turn in loss frequency and further pressure underwriting profits.”

Specialists at Risk?

A.M. Best analysts look beyond the industrywide results to analyze all-lines results for workers’ comp writers, suggesting that more problems might creep into the otherwise stable picture.

Focusing on a group of U.S. private carriers and state funds for which workers’ comp net premiums (including excess comp) constitute at least half of their total net property/casualty insurance premiums—A.M. Best’s Workers Compensation Composite (WCC)— the report notes that the WCC insurers have taken on some of the business shed by larger insurers that have refined their risk appetites, tightened underwriting guidelines, and decreased exposure to the line in recent years. In fact, the WCC increased its market share of all U.S. workers comp net premiums from 33.8 percent in 2010 to 51.7 percent in 2018. In 2018, the WCC wrote $26.4 billion of the $51.0 billion of industrywide U.S. workers comp net premiums.

The report suggests that the recent growth may fuel some negative consequences in the years to come.

In particular, A.M. Best analysts note that recent underwriting profits were partly attributable to takedowns in loss reserves for prior accident years, which may not be available going forward. According to figures in the report, the WCC reported $4.6 billion in net income in 2018, driven by $940 million in underwriting profit. But the WCC had nearly $2.3 billion in favorable reserve development—the highest level recorded in 10 years.

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