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The workers’ compensation industry’s results improved in 2012, as evidenced by a combined ratio of 110.3, a seven point decrease from 2011 and the first decline since 2006. The combined ratio is a measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.

While the industry faces challenges such as poor underwriting results, low investment yields and ongoing uncertainty over the impact of healthcare reform, there were positive signs in 2012. Premiums grew for the second straight year, the combined ratio improved (although it remains elevated), and claims frequency declined at a faster rate than severity increased, according to a special report by the A.M. Best Co.

Operating results for A.M. Best workers’ compensation composite also improved in 2012, primarily due to a smaller reported underwriting loss coupled with solid but declining investment earnings. The composite’s 2012 combined ratio of 114.3 is in line with the overall workers’ compensation line underwriting performance. These improved results reflect year-over-year rate increases and growth in payrolls but are offset in part by rising medical costs and the improving, but still relatively weak macroeconomic environment.

Industry results also have benefited from advancements in technology, which enable companies to react more quickly to negative trends. However, without the benefit of higher investment yields that the industry earned in the past, overall earnings have declined.