March 21, 2018

Best’s Special Report: Workers’ Comp Industry Records Record Premiums in 2016 Despite Potential for Disruption

Oldwick, NJ -(BusinessWire)- The U.S. workers’ compensation sector reported a record high $58.5 billion in direct premiums written in 2016 despite economic, regulatory and legal issues that threaten to reshape the market, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Workers’ Compensation: Costs, Legal Activity and Employment Rolls Are Increasing—But So Are Profits,” states that despite the record premiums, year-over-year growth slowed. Net premium growth declined to 0.2% after expanding at a five-year compound annual growth rate of 6.3% from 2010 to 2015. The deceleration in growth is due mainly to consistent rate decreases in 2015 and 2016, as well an increase in net ceded premiums. The property/casualty (P/C) industry overall has increased its use of reinsurance for the workers’ compensation line since the 2008 financial crisis, ceding nearly 50% more of this business than before the recession.

Although loss experience has improved in recent years, in part evidenced by a 95.5 combined ratio in 2016, A.M. Best believes that reserves for the workers’ compensation line remain deficient. A.M. Best estimates the deficiency at approximately $22.1 billion as of year-end 2016, which is a $1.7 billion improvement from A.M. Best’s 2015 estimate. However, given the increases in the estimated reserve deficiency in five of the last eight years, as well as the overall rate decreases since 2015, A.M. Best remains concerned. According to the report, loss reserve adequacy is especially important for this line because of the long-tailed nature of the line’s liabilities. As of year-end 2016, workers’ compensation reserves accounted for $166 billion or 26.9% of the total U.S. P/C industry’s $620 billion loss reserves. Since adverse reserve development is one of the leading causes of insurer insolvency, reserve adequacy remains a critical component of the Credit Rating process.

A.M. Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite (WCC), which is composed of U.S. companies (including state funds) whose workers’ compensation and excess workers’ compensation net premiums constitute 50% or more of their total net premiums. As some of the larger writers have decreased their exposure to the workers’ compensation business, specialist writers (included in the WCC) have assumed this business. The WCC accounted for 44.8% of all U.S. workers’ compensation net premiums compared with 33.8% in 2010.

Currently, A.M. Best has a negative outlook on the U.S. commercial lines segment, of which workers’ compensation is the largest component, and workers’ compensation insurers remain under pressure due to decreasing rates and increasing competition. Nevertheless, improved loss experience from a decline in frequency and the leveraging of technology greatly benefitted companies’ bottom lines in 2016. Unemployment has decreased steadily since 2010, and workers’ compensation premiums have an inverse relationship with the unemployment rate. However, A.M. Best notes that long unemployment rate declines are typically followed by sharp spikes in unemployment, and believes that workers’ compensation writers should expect payroll and premium growth to halt sooner rather than later unless wage growth accelerates.

To access a copy of this special report, please visit

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