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Workers compensation insurers have generated solid profits in recent years but face an uncertain future, credit rating agency A.M. Best said in a market segment report released Tuesday.
Annual underwriting profit in the comp line of business averaged $4.8 billion over the last five years, “a level of profitability unmatched by any of the other major property/casualty lines,” A.M. Best said.
The net loss ratio has ranged from 45.4% to 49% over the last five years, reflecting the benefits of better workplace safety as well as legislative changes that reined in claim costs. The combined ratio over the same period was between 86.2% and 92.2%, and was 87.9% in 2021.
A.M. Best also cited strong favorable loss reserve developments and low unemployment rates as pointing to a continued rise in comp premiums through the end of 2022. That forecast, however, will depend on other economic factors.
“Inflation could disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a commensurate increase in employee wages, rate increases may be necessary to cover the gap,” Christopher Graham, a senior industry analyst for A.M. Best, said in a statement. “Inflation could also necessitate companies’ further sharpening their risk management and loss control efforts to limit claims frequency.”
A.M. Best also said that while net income for comp insurers is strong, it has not been growing at the same rate as policyholders’ surpluses. This resulted in a drop in after-tax return on equity over the past two years.
WorkCompCentral is a sister publication of Business Insurance. More stories here.