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Annual underwriting profit in the U.S. workers’ compensation line of business has averaged $4.8 billion in the last five years and totaled almost $24 billion during the period – a level of profitability unmatched by any of the other major property/casualty lines of business, according to a new AM Best report.

In its Best’s Market Segment Report, “Workers Compensation Generates Solid Profits but the Future Remains Uncertain,” AM Best states that direct premium volume also rebounded in 2021 to $52.2 billion, following a sharp drop in 2020. Reflecting the benefits of workplace safety and legislative changes that have reined in workers’ compensation claims costs as the frequency of claims continues to decline, the segment’s net loss ratio has ranged from 45.4 to 49.0 in the most recent five-year period.

The combined ratio remained within the range of 86.2 and 92.2 during the period, and was 87.9 in 2021. Strong favorable loss reserve development for workers’ compensation drove the positive calendar-year results and was the primary reason for the entire property/casualty industry’s favorable reserve development. According to the report, what appears to be redundant reserves sets the stage for more favorable development in 2022. In addition, unemployment was at 3.5% in September 2022, down significantly from 5.4% for 2021, and these indicators suggest a continued rise in workers’ compensation premiums through the end of 2022, but that will depend on other economic factors.

“Inflation could disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a commensurate increase in employee wages, rate increases may be necessary to cover the gap,” said Christopher Graham., senior industry analyst, AM Best. “Inflation could also necessitate companies further sharpening their risk management and loss control efforts to limit claims frequency.”

AM Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite, which is composed of U.S. companies, including state funds, whose workers’ compensation and excess workers’ compensation net premiums constitute 50% or more of their total net premiums. As of the end of 2021, these specialists accounted for almost 35% of overall industry’s workers’ compensation net premium volume, up notably from just under 30% in 2011. Net income for this population has been consistently solid, at more than $3 billion each the past six years.

“Although net income remains strong, it has not been growing, even as policyholders’ surplus has,” said David Blades, associate director, AM Best. “This has led to a drop in after-tax return on equity the past two years. Calendar-year 2022 will provide more guidance on the ROE: Will the current, lower return level persist or will the composite’s ROE strengthen and meet or exceed pre-pandemic levels?”

AM Best is hosting a briefing on the workers’ compensation market on Monday, Nov. 7, 2022, at 1:00 p.m.( EST). Senior AM Best analytical staff and leading industry experts will the state of the workers’ compensation market and emerging trends in underwriting, reserving and claims. To register, please visit AM Best’s Briefing – The Workers’ Comp Market: What to Expect in the Year Ahead.