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Workers comp sector improves on higher pricing and improved underwriting

Loss ratios improve throughout sector

Workers comp sector improves on higher pricing and improved underwriting

Higher pricing and improved underwriting are credited for workers compensation insurers' better financial performance in 2014, after years of struggle.

The industry's financial turn-around from the lean years of 2010 and 2011 has translated into declining workers comp advisory rates in many states throughout the country.

“This year's been very favorable for employers,” said Peter Burton, Wayne, Pennsylvania-based senior division executive of state relations at the National Council on Compensation Insurance Inc.

Four of the five largest workers comp insurers had lower loss ratios in 2014 vs. 2013, according to market share data the Washington-based National Association of Insurance Commissioners released in March.

“We've seen the level of rate increases slow across the product over the course of 2014, and that will likely continue,” said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Securities Inc. in Richmond, Virginia. “That also reflects the fact that a greater proportion of the underlying business is at levels that are viewed as adequately priced to make reasonable returns.”

Travelers Cos. Inc., the largest workers comp insurer by premiums written, saw its loss ratio decline last year as did Hartford Financial Services Group Inc., American International Group Inc. and Liberty Mutual Holding Co. Inc., which fell to the No. 4 comp insurer after cutting back on its workers comp business. Zurich Insurance Group Ltd., the fifth-largest workers comp insurer, saw its loss ratio increase nearly 5 percentage points.

“Advances in data analytics in our underwriting, claims and risk engineering are leading to better outcomes for injured workers and our customers,'' Joseph Wells, Hartford, Connecticut-based vice president of workers compensation underwriting and product operations at Hartford, said in a statement. “As a result of these advances, we have seen reductions in lost-time frequency, as well as improved return-to-work outcomes.”

While most of the largest comp insurers only saw small decreases in their loss ratios, “it does reflect stronger underwriting on their parts,” according to the NAIC.

In the case of Liberty Mutual, cutting back on risky workers comp accounts likely also helped improve its results. “They're getting rid of any business that's caused them problems and retaining higher quality insureds,” the NAIC said.

Kai Pan, an insurance analyst at Morgan Stanley & Co. L.L.C. in New York, said improved losses can be attributed in part to workers comp insurers pushing for price increases during the past several years.

“Workers comp, in particular, has shown some meaningful pricing improvements, so that helped improve the underwriting margin,” Mr. Pan said.

Workers comp insurers also have benefited from using claims management strategies to help reduce the severity and frequency of comp claims, Debbie Michel, Chicago-based president of Liberty Mutual's third-party administrator Helmsman Management Services L.L.C., said in a statement. That includes use of outcomes-based medical providers for treating workers and efforts to control the use of narcotic prescriptions in comp claims, according to Ms. Michel's statement.

The NAIC's data aligns with projections from NCCI, which found comp insurer performance stabilizing following a peak in unprofitability in 2010 and 2011.

NCCI's Mr. Burton said that has translated to lower advisory rates for employers across the nation. In the 38 states where Boca Raton, Florida-based NCCI provides ratemaking services, the agency requested 30 workers comp rate decreases for the 2014-15 policy year and only six rate increases.

“The filings speak to the balanced environment we have in workers comp today,” Mr. Burton said.

Meanwhile, loss ratios for the top 25 workers comp insurers as a whole remained relatively flat at about 60.8% in 2014, up from 60.1% in 2013, according to NAIC data. Smaller insurers were most likely to see an uptick in their loss ratio.

Though it's unclear why some insurers' loss ratios increased last year, it could be that claim exposures caused by a growing labor force in recent years have contributed, Mr. Dwelle said.

“There's usually a little bit of uptick in loss exposure associated with an improving jobs market,” Mr. Dwelle said. “Sometimes, that shows itself first in smaller-account business, then in the large business.”

Additionally, larger workers comp insurers may have more resources to invest in predictive modeling and other underwriting tools to help stave off losses that smaller insurers could not avoid, Mr. Pan said.

“You would imagine ... a large company would have better resources to use, so they're probably better off than some of their smaller peers,” Mr. Pan said.