Boca Raton, FL — NCCI recently released its annual State of the Line workers compensation market analysis, describing the current state of the market as “conflicted.” This year’s report indicates that the workers compensation calendar combined ratio was 115 in 2011, the same number as in 2010.
“NCCI has observed a number of countervailing indicators in current industry conditions,” said NCCI President and CEO Steve Klingel. “In some ways, we are seeing an improved condition from 2010. By other measures, however, the market remains in a worrisome state. In sum, we see a market that is conflicted as to its forward trajectory, and that makes for a challenging environment.”
“Workers compensation, because of its direct connection to employment and the labor markets, has been the property/casualty line most significantly impacted by the continued difficult economic environment,” added NCCI Chief Actuary Dennis Mealy. “Combined ratios remain at unsustainably high levels, and investment returns are not sufficiently high to generate operating returns near the cost of capital. On the more positive side, the growth in written premium provides strong support that the worst of the recession has passed. Additionally, the industry is well capitalized for the future.”
As reported above, the workers compensation calendar year combined ratio for private carriers was 115 in 2011, the same result as in 2010. Not only did the overall combined ratio hold steady, all of the underlying components were also remarkably stable. However, for the third straight year, workers compensation holds the distinction of having the highest combined ratio of all the major commercial lines.
In terms of premium (including state funds), net written premium increased to $36.3 billion in 2011. This 7.4% increase in premium is the first increase since 2005, and a welcome shift following the cumulative 27% decline in premium from 2006–2010.
Other market indicators/trends highlighted in NCCI’s 2011 State of the Line report include:
- NCCI estimates that the combined ratio for private carriers for Accident Year 2011 is 114—down 2 points from 116 in 2010.
- The private carrier reserve position continued its modest deterioration in 2011—for the fourth consecutive year. NCCI’s estimate of the reserve position for the private carriers as of year-end 2011 is an $11 billion deficiency.
- Since 2006, NCCI loss costs generally declined; in contrast, so far in 2012, loss costs have generally increased, with NCCI loss costs up 2.5% on average and countrywide bureau loss costs up 7.8%. The increase in 2012 is mostly due to a large increase in bureau loss costs in California. The increases in NCCI states have been attributable to a number of factors, including longer claim durations and upward pressure on claim frequency.
- Lost-time claim frequency improved in 2011. After increasing 3% in 2010, claim frequency in 2011 declined 1% on average in NCCI states. NCCI research last year indicated that distortions in the data resulting from the recession and subsequent recovery affected our measure of claim frequency; current research indicates that those distortions continue.
- In 2010, the average indemnity cost per lost-time claim decreased by 2.8%. In 2011, the average change was still a very modest increase of 2%.
- The average medical cost per lost-time claim showed similarly favorable results. In 2010, the average cost per claim was just 1.3%, while in 2011 the increase was 4.0%. These are the lowest increases in average claim costs since the early 1990s.
- Although investment yields remain low, investment gains for the workers compensation insurance industry remained strong in 2011. Investment gains as a ratio to premium held at 14% of premium, higher than the average return of 11.6% that the industry earned from 2001–2010.
- Although the investment gain has improved, combining the underwriting loss with the large investment gains, the result is a pretax operating loss of 1% for the industry in 2011. This is the third consecutive year of near-zero operating gains.
- The combined ratio of the residual market pools also increased slightly, from 120 in 2010 to 121 in 2011. At this time, the pools are quite small, so individual losses and states can have a disproportionate impact on the combined ratio.
- Depopulation of the residual market ceased in 2011, reversing the trend of declining residual market premiums that began in 2005. Premiums grew by 13% in 2011 to approximately $509 million. Overall, the market share of the residual market pools serviced by NCCI for 2011 increased from 4.6% to 5%.
NCCI’s current analysis shows that the combined ratios for workers compensation remain at unsustainably high levels, and investment returns are not high enough to generate operating returns near the cost of capital. And, although claim frequency declined in the latest year, it is unclear whether it is yet returning to its long-term downward trend.
On the more positive side, the growth in written premium provides strong support that the worst of the recession has passed. Additionally, the industry is well capitalized for the future.
Moving forward, NCCI will continue to closely monitor trends and developments in claims frequency, an uncertain underwriting cycle, the as-yet-unknown impact from healthcare and financial services reforms, including the Federal Insurance Office (FIO), and new efforts to introduce alternatives to workers compensation.
The entire presentation is available here: NCCI 2012 State of the Line Presentation