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Workers comp profits support stable outlook for commercial lines: Best

Workers comp profits support stable outlook for commercial lines: Best

Workers compensation remains a profitable line of business for U.S. commercial insurers and is contributing to a stable outlook for the sector, according to a report by A.M. Best Co. Inc.

“The tailwinds supporting the stable outlook are demonstrated by the generally favorable earnings generated by the workers compensation line of business through the first three quarters of 2018,” Best said in its Market Segment Outlook: U.S. Commercial Lines report released on Monday. “Year-over-year rate declines have not yet had a negative impact on the line’s loss ratio. In fact, with the benefit of persistent favorable development in prior years’ loss reserves, the calendar year loss ratio continues to improve. Loss trends have remained benign, although concerns about medical cost inflation, as well as the potential for accelerating frequency should employers hire less-qualified candidates, will also be a consideration in our view of this line of business.”

Total net premiums written have benefitted from the strong labor market, with payroll increases more than offsetting the impact of lower rates, according to the report. 

“Workers comp is one of the commercial lines in which the application of technology has played a key role in diminishing the amplitude of market cycles,” Best stated. “In previous soft market periods, quarterly declines of 5% or more were common, with declines of more than 10% not unusual at the bottom of the cycle. However, after three years of consecutive rate declines, there has not been a quarter in 2018 for which companies have reported a decline of 5% or higher. A.M. Best believes that the use of technology, which has provided greater insights into underwriting, pricing and claims decisions, has helped support the line’s health. Although the forces of supply and demand will always cause some irrational behavior among competitors, we expect that volatility in future cycles will be moderated through the use of technology — or at the very least, companies will be able to successfully leverage innovative technology, allowing them the insight to react more quickly to changing market dynamics.”

Other factors contributing to Best’s decision to maintain its stable outlook for the commercial lines segment include robust risk-adjusted capital capitalization despite an elevated level of catastrophe losses in 2018, the benefits from the Tax Cuts and Jobs Act and a stable reinsurance market, according to the report.

“These favorable factors are partly counterbalanced by growing pressure on pricing and ongoing concerns about the health of certain other liability sublines (such as financial lines) as well as the commercial auto line,” Best said in the report. “The outlook assumes that future catastrophe losses will return to historical averages and that the segment will continue to benefit from the effective implementation of underwriting and claims technology.”




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