Workers compensation insurers have seen some recent improvements in their financial performance, but observers are concerned that underfunded reserves and low investment returns could dull the bright spots for the near term.
“It's nice to see the (workers comp rates) turn around, but three years of positives definitely don't offset five years of declining rate environment,” said Gordon McLean, senior financial analyst with Oldwick, N.J.-based rating agency A.M. Best Co. Inc.
Net written workers comp premiums reached $41 billion in 2012, up 9.5% from $37.5 billion in 2011, Best said in its November workers comp “Segment Review” report. Meanwhile, Best said workers comp insurers saw their combined ratio decline to 110.3% in 2012, down from 117.8% in 2011 and the first combined ratio decline for the U.S. comp industry since 2006.
The National Council on Compensation Insurance Inc. also reported improvements for workers comp insurers last year. Workers comp insurers reported net written premiums of $35.1 billion in 2012, up 8.7% from $32.3 billion in 2011, Boca Raton, Fla.-based NCCI said. Combined ratios also declined in the NCCI report to 108% in 2012, down from 115% in 2011.
The workers comp ratings and research agency estimated that net written premiums would climb 6% year-over-year to $37.2 billion in 2013 and that combined ratios would fall to 106% this year.
“My speculation is that we will continue to see this modest hardening” moving forward, said Harry Shuford, chief economist for NCCI.
Experts attribute the improved performance to a slowly improving economy, recent successes in pushing for higher workers comp rates and a focus on improved underwriting.
Mr. Shuford noted that the workers comp market has grown overall as payrolls have increased in recent years. That increase led the residual workers comp market to grow to $800 million in 2012, up from $500 million in 2011 — marking the first “material” increase in the residual market since 2002, according to NCCI.
The firming rate environment has pushed some employers out of the voluntary comp market into the assigned risk marketplace, which has provided some benefits for insurers in both segments, Mr. Shuford said.
“When an employer leaves the voluntary market and goes to the residual market, the quality of both improves,” Mr. Shuford said.
Best's Mr. McLean said underwriting has become a key focus for insurers in recent years to make up for low investment yields. He expects that trend to continue since the Federal Reserve Bank has continued to hold interest rates at low levels.
“We definitely have seen companies take another look at the exposures within the line that they insure,” Mr. McLean said of the underwriting focus.
Elizabeth Haar, president and CEO of Accident Fund Holdings Inc. in Lansing, Mich., agreed that underwriting has been a key focus for the workers comp insurer. The company has worked to develop its underwriting predictive model and has been careful in its risk selection while implementing safety programs that have helped reduce comp claim frequency for insured employers, she said.
Those strategies have supported Accident Fund's financial results despite the soft market and uncertainties in the workers comp industry, such as how health care reform will affect workers comp insurers and whether the federal government will renew the Terrorism Risk and Insurance Act of 2002, Ms. Haar said.
“While it's improving, there is still a lot of risk that goes with that uncertainty,” she said.
Despite positive signs for workers comp insurers, experts say they're keeping an eye on possible trouble ahead in the comp market.
NCCI's Mr. Shuford said insurers still have high combined ratios and are losing money on workers comp policies that they underwrite. Investment income in recent years has been sufficient to cover comp losses, he said, but he's concerned that trend may not hold up over time.
“We have a bit of a concern that over the next two or three years, as old investments mature and are replaced by new investments, that the investment income is going to weaken,” Mr. Shuford said.
Best's Mr. McLean also noted that workers comp reserves remain underfunded. According to Best's report, there was an estimated workers comp reserve deficiency of $27.8 billion in 2012, up from $26.7 billion in 2011 and $21.6 billion in 2010.
It remains to be seen how long it will take for the workers comp market to return to full health, he said.