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Comp insurers face threat of premium declines, rate pressure

Posted On: Nov. 3, 2020 4:19 PM CST


A sharp drop in direct written premium, low interest rates and continued negative premium rate pressure are likely to create challenges for workers compensation insurers in the next few years, experts say.

Although early dire forecasts of pandemic-related effects on the comp line have not transpired, COVID-19 uncertainty could add to those difficulties, they say. 

“2020 is an unprecedented year in the roughly 110-year history of workers compensation,” said Robert Hartwig, clinical associate professor and director of the Risk and Uncertainty Management Center at the University of South Carolina in Columbia. “Even to this day, we’ve recovered only about half of the jobs” lost when the country went into lockdown in March.

“Some of the lessons here are not going to come from historical insurance data, they’re going to come from economic experience and economic expectations,” he said.

While workers compensation remains highly profitable, pricing trends have put pressure on the line, said James Auden, Chicago-based managing director of insurance for Fitch Ratings Inc.

In the past five years, net written premium in the industry has held steady, ending 2019 at $47 billion, and the line’s combined ratio averaged 91% during that period, according to recent data from Fitch.

The first half of this year saw direct written premium decline by nearly 10% amid the sharp decline in employment due to COVID-19 shutdowns; however, claims frequency declined dramatically because of changed risk exposure, Fitch research shows.

The industry is likely to see long-term effects from the changed risk exposures, such as greater use of telemedicine, reduced travel and more work-from-home employees, according to Fitch.  

Despite workers comp’s continued high profitability, the negative premium rate trends are putting pressure on the line, Mr. Auden said.

“With that gradual erosion, one factor supporting (workers comp) is the loss reserve strength of the insurance carriers,” he said. “Workers comp has had very good reserve experience in the last two to three years, and I still think there’s redundancy in reserves.”

But the degree to which “reserving practices will change for 2020 is unclear,” Mr. Hartwig said. “It’s possible that companies will be more cautious about releasing reserves given the uncertainty. That alone could have a material impact in driving up the combined ratio.”

The National Council on Compensation Insurance, which typically provides preliminary estimates of net written premium volume and combined ratio in late fall for the current year, declined to provide data “given the uncertainties surrounding the current pandemic.”

Typically, Boca Raton, Florida-based NCCI would use historical data to provide its first peak of 2020 premium volume, but the “very volatile” data from the early part of the year precludes the ratings agency from applying its typical historical loss development factors, said Jeff Eddinger, senior division executive at NCCI.

Many questions remain for forecasters, such as what the outcome will be when insurers reconcile the premiums for 2020, and whether the various incarnations of COVID-19 rebuttable presumption laws — currently in place in nine states and proposed in at least a dozen — will lead to an uptick in comp claims.

“We have real examples of some of those (COVID-19 claims) — the costs can be in the millions,” Mr. Eddinger said. “I think carriers need to be on the lookout for those rare but lingering, very expensive, very serious injuries and claims.”

NCCI is working with a modeling firm to predict whether a pandemic provision may be something brought up in next year’s filing season, similar to the terrorism provisions that were introduced after 9/11, he said.

After 9/11, comp insurers chose not to renew some policies for employers located in tall buildings or near landmarks, or changed the way they underwrote those risks, “and that could happen with COVID,” he said.

There are other factors at work that could put downward or upward pressure on rates, such as the hospitality industry and airlines reducing jobs and fulfillment companies like Amazon adding workers, Mr. Eddinger said. “Whenever you have a change in the mix of employment, there is going to be some impact on costs,” he said.  

“A key metric to keep an eye on is the labor force figures, to give a sense of where the payroll exposures are,” Mr. Hartwig said.

He said that although there is no question that workers comp has seen substantial payroll declines this year and comp premiums are likely to be down into 2021, he expects the economy to rebound more quickly than during other periods of labor force reductions.

“I think most carriers will be looking past this and understand that this is temporary,” Mr. Hartwig said. “I think recovery from COVID will actually occur much more quickly than the recovery from the financial crisis, which is not only good for the overall economy but very good news for property/casualty insurers.”

More insurance and workers compensation news on the coronavirus crisis here.