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More states are approving workers compensation rate increases this year as insurer results deteriorate amid rising injury expenses and the Great Recession's hammering of employer payrolls.
In states where regulators have approved workers comp rate increases, insurers are passing costs on to employers of all sizes, although smaller buyers are feeling the greatest impact, brokers say.
After years of rate and premium decreases, rising costs and diminished payrolls, insurers' combined ratios have reached untenable levels, making rate increases necessary in more states but not all, industry sources say.
“When we look at the past several years that industry premiums have been coming down significantly, you were seeing rate decreases in a variety of states and also diminishing payroll,” said Frank Freund, chief financial officer in Lansing, Mich., for Accident Fund Holdings Inc.
“Everybody's combined ratio has been climbing because of the lower premium levels, and you can only do so much with expenses,” Mr. Freund said. “The expense portion of the combined ratio continues to grow. So you are going to see those increasing combineds until rate adequacy comes about.”
Workers comp premiums generally are a function of an employer's payroll multiplied by state-approved rates. But other factors, such as market competition, employer size and policy structure influence the actual premium amount paid by an individual insurance buyer.
Shrunken payrolls also mean insurers need larger rates to cover losses, sources said.
Already this year, NCCI Holdings Inc. has filed for rate increases in 19 of the 38 states it provides with rating services, and it is only partially through its annual rate filing cycle, which runs from July 1 to June 30.
During all of last year's filing cycle, Boca Raton, Fla.-based NCCI asked regulators for increases in only 15 states, said Peter Burton, NCCI's senior division executive for state relations in Wayne, Pa.
Conditions and laws affecting rates differ by state, so NCCI also has applied for rate decreases in seven jurisdictions this year. In Alabama, for example, it is seeking its steepest rate decrease of 9.3%.
Additionally, some NCCI rate increase requests this year have been “very modest, single-digit adjustments” in contrast with Virginia, where NCCI is seeking its largest increase of 10.5%, Mr. Burton said.
But there are more states that will see NCCI filing for increases, and the number of increases this year reveals a trend, Mr. Burton said.
“It's the general pattern that is happening with workers comp around the country,” Mr. Burton said.
The New Jersey Compensation Rating & Inspection Bureau, for instance, recently applied to the state's Department of Banking and Insurance for a 6.9% rate increase for 2012.
In May, the New York Insurance Compensation Rating Board proposed a 10.4% loss-cost hike, but Insurance Superintendent James J. Wrynn approved an average 9.1% increase effective Oct. 1.
During a Florida hearing last week, attention focused on physician dispensing of repackaged drugs accounting for 2.5% of an 8.9% rate increase NCCI is seeking there.
But in general, costs such as those for medical expenses, are rising nationwide. Meanwhile, employer payrolls remain below pre-recession levels, although premium growth is on track to be positive this year for the first time since 2005, according to A.M. Best Co. Inc.
Insurer results also have suffered under flattening or increasing claims frequency in many states, several sources said. That represents a recent shift from a long-term decline in claims frequency that offset increasing costs over many years.
Under those conditions, deteriorating underwriting results are more the norm than the exception.
Last week, Best reported that workers compensation insurers' underwriting results likely will weaken further before improving, as “conditions appear grim over the near term.”
Best said in its “Market Review” that the workers comp line—which is among the largest in the U.S. property/casualty insurance industry, representing 16% of all commercial lines premium—experienced the greatest deterioration among the property/casualty industry's overall underwriting performance.
The combined ratio for workers comp insurers is projected to reach 121.5% for 2011, up from 118.1% in 2010 when “business deteriorated sharply” and the industry's combined ratio rose to the highest level since 2000, Best reported.
“Industry combineds of 120% or 121% indicate rates are not where they need to be,” Accident Fund Holding's Mr. Freund said.
And lost costs are likely to continue growing, said Bruce Hockman, executive vp and workers comp practice leader in Philadelphia for Towers Watson & Co.
“The market really has to sort out where (insurers are) going to get pricing because they can't even have a constant underwriting result of 115% and hope to stay in this line of business,” Mr. Hockman said. “Not with today's investment marketplace. It's impossible.”
The rate increases that are occurring are getting passed on to employers, although insurer competition remains a factor in pricing, brokers said.
“For workers compensation as of (Oct. 1), we are seeing most of our accounts, maybe as high as 70%, see at least some rate increase on their renewals,” said Pamela F. Ferrandino, casualty practice leader, placement for Willis North America in New York.
Small accounts that do not take retentions are experiencing the greatest amount of rate hikes pushed through to them, Ms. Ferrandino said. Similarly, a larger percentage of middle-market accounts are experiencing insurers passing rate increases through to them than large national accounts.
Large national accounts and larger middle-market employers are seeing an average of 1% to 2% rate increases passed on to them by insurers, added Jesse Olsen, vp in the risk finance practice for Lockton Cos. L.L.C. in Kansas City, Mo.
Those buyers also are seeing premium increases of up to 4%, partly because of some growth in payrolls, although any increases are “heavily jurisdiction-dependent,” Mr. Olsen said.