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Workers compensation insurers are poised for a second consecutive year of underwriting profitability as a result of improved economic conditions, partnering with safety-conscious employers and focusing on data analytics to mitigate potential losses.
In a preliminary report, the National Council on Compensation Insurance Inc. estimated the comp industry's 2015 combined ratio would be 96%, an improvement over 2014's combined ratio of 98%.
Primarily because of a projected increase in written premiums, 2014 was the first workers comp underwriting gain since 2006, according to the Boca Raton, Florida-based rating agency. And NCCI said last month that it expects net written premiums to reach $40.7 billion for private comp insurers this year, a 5.7% increase over last year.
Higher premiums are “a sign of a healthy market”, and payroll growth is a major reason for the increase, said Sean Cooper, director and actuary for NCCI.
Employers might be paying more in premiums to cover a larger number of workers, but “if (they're) going to be hiring twice as many employees, it's probably because (they've) got that much more business,” Mr. Cooper said.
In what Kurt Narron, Houston-based vice president and account executive at Lockton Cos. L.L.C., calls a “soft-plus market,” insurers are taking a “very disciplined approach to their underwriting … but they're eager to go after new business because they need that revenue.”
It's definitely a buyer's market, sources said.
Most states have filed for advisory rate cuts this year, according to NCCI. Advisory rates have ranged from a 14.8% decrease in Oklahoma to a 3.4% increase in Virginia, NCCI said.
However, whether employers benefit from rate cuts depends on their specific risk characteristics, as well as what they're doing to mitigate losses “through a safety program, a loss-control procedure or providing better data to insurance carriers or the market to
differentiate their risk,” said Christopher Flatt, managing director and leader of Marsh L.L.C.'s Workers' Compensation Center of Excellence in New York.
Mr. Flatt added that he's seeing an accelerated increase in the number of rate reductions for his clients.
The declining frequency of claims is partly driven “by whatever carriers are doing to (give incentivizes to) employers to improve safety,” said Bruce Wood, Washington-based associate general counsel and director of workers compensation at the American Insurance Association.
Mr. Narron said employers that have a disciplined loss control approach will “benefit in this cycle because insurers want that client, and they'll fight for that client because it's a good risk.”
Insurers trying to keep profitable workers comp accounts are “willing to be more competitive on terms and conditions,” Mr. Flatt said, adding that more insurers are now accepting alternative forms of collateral, such as surety bonds in place of letters of credit, and offering multiyear commitments.
But from what Mr. Narron calls his “micro view of Texas,” which is “highly impacted by the energy industry,” he's “seeing insurers fight and claw to hold onto premiums” as employers either disappear or merge.
Meanwhile, the growth rate of the residual market was slower in 2014 than in the prior two years, and early indications are that premiums will level off or decrease slightly in 2015, according to NCCI.
The combined ratio for the 22 residual market pools administered by NCCI rose by 2 percentage points last year to 105%, primarily because of a $27 million underwriting loss projected for the Massachusetts Workers' Compensation Assigned Risk Pool, NCCI said in the report.
“Despite the 2014 increase, the recent combined ratios remain favorable, demonstrating the success of the industry's continued focus on self-funded residual markets,” NCCI said in the report.
“Relatively low” participation in the residual market is one sign of a competitive, “vibrant voluntary market,” Mr. Wood said.
NCCI's findings are similar to those of A.M. Best Co. Inc.
The Oldwick, New Jersey-based rating agency found in October that the workers comp industry reported solid underwriting performance last year, with insurers' combined ratios falling to 101.5%, from 103.7% in 2013 and 110.3% in 2012.
“The workers compensation industry is showing promising signs for the near term with ongoing overall pricing improvements and generally tight underwriting standards being maintained,” A.M. Best said in the report, adding that it expects the 2015 calendar year results to “show additional improvement in underwriting and overall operating performance.”
Noting that the industry is cyclical, sources say they expect current market conditions to stick around in the short term.
“There's a lot of capital in the market right now,” Mr. Narron said. “Until that capital goes away, whether it's a large catastrophic event … or there's just a change in appetite, we're seeing all signs point to this market is here to stay for a little bit longer.”