Workers compensation insurer rate cuts may follow profitable 2014Posted On: Nov. 23, 2014 12:00 AM CST
Workers compensation insurers could see their first year of underwriting profitability in nearly a decade due to rate increases, an improving economy, and a focus on data analytics that has helped improve underwriting and workplace safety.
A preliminary analysis by the National Council on Compensation Insurance Inc. earlier this month shows private workers comp insurers are expected to have an aggregate combined ratio of 96% this year. If that holds up when NCCI finalizes its data next spring, it would be the first time the workers comp industry has been profitable since 2006, according to the Boca Raton, Florida-based ratemaking agency.
Insurers' financial gain likely will result in lower workers comp rates for employers, experts say. They're cautiously optimistic that the positive financial trends in the workers comp market will be sustainable past 2014.
“We have seen a return to underwriting discipline, and if NCCI's projections are accurate, then this discipline has paid off for the marketplace,” Stacy Seaburg, executive vice president at Lockton Cos. L.L.C. in Houston, said in an email.
Private insurers had a combined ratio of 101% in 2013, a number that has fallen steadily since reaching 115% in 2010 and 2011.
Meanwhile, workers comp premiums are expected to grow 7% this year over 2013 to $39.3 billion, NCCI said, vs. an increase of 4.5% in 2013.
Angela McGhee, practice leader and senior actuary with NCCI, said the 2014 projections are based on declining frequency of workers comp claims in 2013 that outpaced “modest” increases in indemnity and severity of claims.
Additionally, higher workers comp premiums — which have been driven by increasing employer payrolls and higher insurer pricing — contributed to positive financial projections this year, she said.
“These are averages countrywide, so there can be very significant variation by state and by company,” Ms. McGhee said.
NCCI's projections align with a report earlier this month by Oldwick, N.J.-based rating agency A.M. Best Co. Inc.
Best found that combined ratios for workers comp insurers fell to 98.6% in 2013, down from 110.3% in 2012 and a high of 118.1% in 2010.
That was based on “modestly better core underwriting performance” and “ongoing technological advancements” that have allowed insurers “to recognize and react more quickly to negative trends” in the workers comp market, according to the Best report.
Pam Ferrandino, executive vice president and casualty practice leader at Willis North America Inc. in New York, said poor workers comp financial performance in recent years prompted insurers to seek repeated rate increases in workers comp pricing.
She said insurers also have focused on using analytics to determine if an employer's account would be profitable and have declined to underwrite companies that were deemed too big of a risk for workers comp.
“They were taking actionable steps to change their profitability, either through rate (increases) where they could get it or just walking away from accounts where they couldn't,” Ms. Ferrandino said.
Additionally, workers comp insurers have used data in recent years to determine safety processes and best practices that could help employers lower their workers comp liabilities, said Thomas Rowe, managing director at PricewaterhouseCoopers L.L.P. in San Francisco.
“Workers compensation underwriters, because of their improvements in analytics, can better estimate what drives ... favorable outcomes for the employers and make recommendations and create incentives for employers to invest in workplace training, invest in safety equipment (and) do the things that the employers should do to reduce frequency and severity of loss,” Mr. Rowe said.
Insurers' improved performance likely will translate to lower workers comp pricing for buyers, said Thomas Ryan, New York-based workers compensation market research leader at Marsh L.L.C.'s Workers' Compensation Center of Excellence.
“We're actually seeing the market kind of softening as a result and becoming a little more favorable for employers,” he said.
Sources say it's difficult to determine whether the current positive financial conditions for workers comp will be short- or long-lived.
“It's a very cyclical environment, so I think we're being cautious in hopefully seeing a positive trend,” Mr. Ryan said.
“We feel underwriters will continue to be stringent on their underwriting guidelines,” Ms. Seaburg said.
Calls seeking comment from the Property Casualty Insurers Association of America and major comp insurers were not returned.