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Interest rates play a notable role in the workers compensation insurance underwriting cycle, with interest rate increases driving soft comp markets and interest rate declines creating a hard market environment, according the National Council on Compensation Insurance Inc.
While the commercial insurance industry has a “prevailing notion” that soft comp markets are caused by excess capacity, Boca Raton, Florida-based NCCI said Thursday that market fluctuations are driven largely by “unrealized gains in insurers' stock portfolios.”
“Insurance rates must respond to changes in financial markets, especially interest rates,” says the report written by NCCI chief economist Harry Shuford. “More importantly, market forces compel insurers to compete on price, leading to soft market conditions when investment potential appears to be strong.”
NCCI's full report can be found on the rating bureau's website.