A.M. Best Co.’s year-end review of insurance carriers with concentrated exposure to the volatile California workers’ comp market culminated in the downgrades of three large carriers in this market over the past two weeks: State Compensation Insurance Fund of California; Zenith National Insurance Group; and Argonaut Insurance Group.
A.M. Best continues to monitor financial strength and reserving trends in the California workers’ comp market, which has exhibited tremendous financial volatility and greater market instability than any other property/casualty business segment.
A.M. Best is particularly concerned about specialty monoline writers, given their business concentration in this difficult market, exposure to significantly under-priced business written in 1998 and 1999 and rapid deterioration in workers’ comp claim severity trends. These concerns are amplified by the California Workers’ Compensation Rating Bureau’s recent projection that the industry’s loss-reserve deficiency within the segment could exceed $4 billion.
The downgrade of the State Compensation Insurance Fund of California reflects the continued deterioration of the fund’s operating performance and aggressive premium growth in the volatile California market. The fund, which holds a 25 percent share of this market, has exhibited very weak underwriting results, as evidenced by an average combined ratio of 142 over the past five years. The resulting business concentration led to operating losses in 1998 and 1999, and further losses are expected. While the fund has exhibited more stable reserve trends than its competitors, the competitive pricing environment has hurt it.
In addition, as a nonprofit government agency, the fund’s access to the capital markets and ability to diversify its products and territory are limited. The fund’s shift to an agency- and broker-based business model is expected to increase its expense position, and premium production has increased significantly in 2000. This growth adds uncertainty to the fund’s loss-reserve position and future profitability, given the volatility and rising loss trends in the market.
Offsetting these negative rating factors are the fund’s strong capital position and dominant market presence. The rating also acknowledges the fund’s capacity to provide a permanent workers’ comp market in California while maintaining a high level of service, profit sharing with its policyholders and strong capitalization. Management has demonstrated specialized underwriting expertise and the ability to successfully expand and contract business during highly variable market conditions. The fund also benefits from its exemption from federal income tax.
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