NEW YORK: Declining rates and growing competition in the U.S. workers’ compensation insurance segment could begin to challenge carriers’ ability to retain profitable accounts and maintain market share, a new AM Best report said.
The Best’s Market Segment Report, “Declining Rates Could Threaten Profitability of U.S. Workers’ Compensation Line,” states that rate decreases in the vast majority of the United States have led to margin compression in this segment.
As rate levels continue to decline, competitive pressure could mount on workers’ compensation specialists to the point that will adversely affect not just company income statements, but balance sheets as well, especially if companies are unable to set aside adequate capital for loss reserves.
However, the profitability of the workers’ compensation line remains strong, despite extended market softening, as low reported claims frequency, legislative reforms, more effective use of data and predictive analytics and enhanced workplace safety measures drive positive operating results.
Insurers in the workers’ compensation segment reported an 86.1% combined ratio in 2018, compared with 92.1% in the previous year; however, on a direct basis, loss ratios are deteriorating in 2019 compared with 2018. AM Best is concerned about reserve adequacy, noting that with the consistent rate decline since 2015, the adequacy of claims reserves in the long term remains uncertain.
Additionally, while lost-time claims frequency continues to decline, claims severity continues to rise, driven to a large degree by injuries workers have suffered in motor vehicle crashes.
AM Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite (WCC), 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 some of the larger writers have decreased their exposure to the workers’ compensation business, specialist writers, included in the WCC, have assumed this business. The WCC accounted for 51.7% of U.S. workers’ compensation net premiums compared with 33.8% in 2010. The WCC reported $4.6 billion in net income in 2018, a 12.2% year-over-year increase. Through the first half of 2019, the WCC has generated approximately $2.1 billion in net income.
AM Best currently maintains a stable market segment outlook on the U.S. workers’ compensation industry, the largest component of the U.S. commercial lines segment. Despite the positive results across the segment, aggregate direct premiums written have decreased modestly due to the declining rates.
Unemployment remains low; however, AM Best notes that spikes in unemployment typically follow long unemployment rate declines, and believes that payroll growth may plateau. Consequently, any resulting premium growth may dissipate sooner rather than later unless wage growth accelerates.
Edited by Nayyar Iqbal