Fitch Ratings reports that the U.S. workers’ compensation insurance market reported strong underwriting performance for the third consecutive year in 2017, with an industry statutory combined ratio of approximately 92 percent..
However, a steady decline in premium rates from increased competition will ultimately lead to weaker underwriting results.
According to the summary prepared by the Insurance Journal, Fitch believes that while the industry may still generate underwriting profits this year, workers’ compensation results will move toward break-even in 2019, with low visibility of longer term projected results due to historical performance volatility.
Positive performance drivers include underwriting exposure growth, continued falling claims frequency rates and conservative reserve levels.
Past underwriting and pricing actions and relatively stable loss trends have positively influenced recent market performance. Recognition of greater reserve redundancies in 2017 also partly drove results, which totaled ~12 percent of market earned premiums. Fitch says favorable loss reserve redundancies will materialize for the next few years but to a lessening degree than in 2017.
Factors that can negatively affect future industry performance include premium rate pressure, increasing medical loss severity and erosion of past reform benefits in key states.
Market direct written premium volume in 2017 declined by 30 bps from the prior year to $56 billion, representing the first year of lower market premiums since 2010.
Net written premiums fell by 1.3 percent during the same time, mainly due to larger reinsurance cessions. Premium revenue weakness, along with greater technology-related spending, has led to higher expense ratios, which have risen two points since 2014 for the industry.
Workers’ compensation premium growth will continue to lag other commercial lines segments due largely to divergent pricing trends. According to the Council of Insurance Agents & Brokers’ quarterly Commercial Property/Casualty Market Index Survey, renewal rates in the workers’ compensation segment declined in each of the past 13 consecutive quarters.
Shifts in loss cost trends, particularly claims severity, represent a source for future workers’ compensation performance deterioration that bears further monitoring. Both indemnity and medical claims cost severity were relatively stable compared with historical norms for nearly a decade but ticked up recently.
The National Council on Compensation Insurance’s latest State of the Line presentation notes an increase in workers’ compensation indemnity and medical cost claims severity of 4 percent each in 2017.