The workers compensation insurance market entered the new year in a favorable environment as signs of economic recovery continue to stabilize renewals, market experts say.

“Our outlook for the foreseeable future continues to be stable for most buyers,” said Debbie Goldstine, Chicago-based executive vice president of U.S. casualty, technical intelligence & emerging risk at Lockton Cos. “Signs of economic recovery did present in our renewals, and our payroll forecasts for work comp renewals for the second half of the year were up about 5%.”

In November, the National Council on Compensation Insurance published its 2021 Workers Compensation Financial Results Update, which assessed the calendar year combined ratio at 87%. The reserve position for private insurers remained strong, growing to a redundancy of $14 billion as of year-end 2020 — results a spokeswoman said showed the market to be “resilient.”

A.M. Best & Co. revised its previous outlook for the U.S. workers compensation insurance market for 2022 from negative to stable, noting an unexpected “muting” effect the COVID-19 pandemic had on insurers’ balance sheets and operating performance.

The comp market continues to report favorable combined ratios driven by consistent loss ratios, according to A.M. Best’s most recent report, issued in November. Underwriting results deteriorated only slightly, benefiting from “lesser fraud, fewer workplace accidents, and lower defense costs.”

Strong retention rates were widely reported by workers compensation writers in 2021, many of whom exceeded pre-pandemic levels, according to Dan Mangano, Bridgewater, New Jersey-based senior financial analyst at A.M. Best. The cause, he said, may be agents' or brokers' reluctance to move accounts.

“Workers compensation continues to be the only commercial insurance line pressured by a trend of declining rate actions, although the level of these decreases does seem to be moderating,” Mr. Mangano said.

“Given the current competitive nature of the workers compensation market, there is concern that some insurers may begin to loosen their terms or conditions or decrease pricing below adequate levels in order to maintain or attract business,” he said.

And there are other potential offsetting factors to the market to watch in 2022.

Despite COVID-19’s less-than-expected impact on the industry, “there are several cases developing around COVID, including litigation on spouses contracting COVID at work and a concentration of risk examination,” Ms. Goldstine said.

Pricing observed in 2020 and 2021 will continue to waver as other factors are roped in, according to Coleman Johnson, Bedford, Massachusetts-based chief underwriting officer for the U.S. middle market at Liberty Mutual Insurance Co.

“Despite its general stability as a line of business, there's definitely some volatility in the environment right now, particularly with some key variables that directly impact workers comp like interest rates, inflation, the economy and the recovery, unemployment and uncertainty with COVID,” Mr. Johnson said.

“I don't think it's as easy to peg exactly where those trends are headed and what that means for pricing in the market as it might have been in the past,” he said.

Historically low interest rates and wage inflation this year will likely have an effect, Mr. Johnson said.

Unfavorable trends include a labor shortage and the hiring of “new, less-skilled workers,” which historically has meant increases in claims frequency in workers comp, Mr. Johnson said.

“Add that to an already positive severity for the line for medical and indemnity, and the frequency of large losses continuing to climb, there’s an increasing loss cost that we have to keep up with if we want to have a stable healthy comp market going forward,” he said.

Other issues to watch in workers comp include an aging workforce, comorbidities independent of COVID-19, and the exclusive remedy being challenged, which will continue to be monitored, Ms. Goldstine said.