The average combined ratio for the workers compensation line is expected to rise to the “mid-90s or higher” in 2024 after nearly a decade of record lows “given flat or declining premium volume, potential for rising claims costs from medical inflation, and a reduction in favorable reserve development,” according to a report released Thursday by Fitch Ratings Inc.
The comp line is the strongest-performing commercial product for the U.S. property/casualty industry, with the ratings agency reporting that the sector has seen nine consecutive years of underwriting profits and an average combined ratio of 91%. In 2023, the combined ratio sat at 88%, according to Fitch, which said a long-term trend of declining claims frequency and stable loss severity trends are “key factors” contributing to the line’s success.
However, Fitch Ratings anticipates higher combined ratios in the next two years as the result of “weaker pricing.”
Fitch Ratings said the extended period of workers comp profits coincides with “substantial” annual reserve redundancies as calendar-year reserve development has exceeded 12% of the sector’s earned premiums for seven consecutive years, from 2017-2023.
Although the industry is likely to maintain reserves, “more abrupt changes in market competitive conditions or loss severity trends could materially affect reserve experience and move the subsector closer to break-even or worse underwriting performance, with a corresponding effect on overall industry profitability,” the report said.