Oldwick, NJ -(BusinessWire)- The U.S. workers’ compensation segment continued its positive performance in 2017, which was boosted by another year of growing payrolls that helped offset rate decreases and overall soft-market conditions, according to a new AM Best report.
The Best’s Market Segment Report, “Workers’ Compensation Profitability Threatened by Rising Medical Costs, Payrolls and Legal Expenses,” states that the underwriting performance of the workers’ compensation segment in 2017 reflected the segment’s ongoing improvement over the past several years, with insurers reporting a 92.4 combined ratio, compared with 95.5 in the previous year.
The report notes, however, that $6.6 billion in reserve releases translated to a 4.7-point improvement on the pure net loss ratio, a component of the combined ratio. Workers’ compensation insurers also recorded a 4.7% decline in direct premiums written in 2017 to $55.8 billion, attributable mainly to consistently declining rates. Lastly, while lost-time claims frequency continues to decline, which is helping to offset competitive market pressures, claims severity continues to rise due to a host of factors, including notably the rapid expansion of smartphone ownership over the last decade, as well as attorneys’ growing involvement and litigation, which has led to high average settlements on cases.
AM 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 55.9% of all U.S. workers’ compensation net premiums compared with 33.8% in 2010. The WCC reported $4.4 billion in net income in 2017, as an 8.4% jump in net investment income and an increase of approximately $600 million in realized capital gains resulted in an 11.6% year-over-year increase. Through the first half of 2018, the WCC has essentially maintained its pace of 2017, generating approximately $2.0 billion in net income.
Currently, AM Best has a stable outlook on the U.S. workers’ compensation industry, the largest component of the U.S. commercial lines segment. Despite the positive results across the segment, AM Best believes the trend of declining rates likely will trigger profit margin compression, possibly as soon as 2019. Unemployment has decreased steadily since 2010; however, AM Best notes that long unemployment rate declines typically are followed by sharp spikes in unemployment, and believes that workers’ compensation writers should be prepared for a downside scenario as well.
Access the full copy of this special report: Best’s Market Segment Report:Workers’ Compensation Profitability Threatened by Rising Medical Costs, Payrolls and Legal Expenses
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