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The organization, which files rate recommendations for insurers in many states, recently released its annual State of the Line report, which analyzes the workers' comp market. The findings indicated that the workers' comp calendar year combined ratio was 101 in 2008, which was unchanged from the final 2007 number. This figure is a sum of two ratios -- one calculated by dividing incurred losses plus loss adjustment expenses by earned premiums, and the other calculated by dividing all other expenses by written premiums. The 2008 ratio means that workers' comp insurers broke even last year.

"We are pleased to report that the workers' compensation insurance industry continues to function quite well, with active competition for business and a shrinking residual market," said Steve Klingel, president and CEO of NCCI. "However, the low interest rate environment that has persisted for several years, combined with the dismal short-term performance of the equity markets, continues to leave the line with post-tax returns that barely meet the industry's cost of capital."

"The calendar year and accident year underwriting results continued near break-even, which, in this investment climate, is a necessity if the industry hopes to earn a reasonable return on its capital," he said.

However, Mealy noted that the industry is not without its challenges. For these reasons, NCCI changed its short-term view of the insurance line from optimistic to guarded, and the long-term outlook for workers' comp to cautionary. These concerns, according to NCCI, include:

• Rising medical costs. Medical costs, Mealy said, remain a significant challenge and continue to rise faster than wages.
• Higher indemnity claim costs. Researchers found that indemnity claim costs also continue to outpace wage increases.
• Lower investment yields. Mealy said low investment yields may keep pressure on industry underwriting results.
• Uncertain underwriting cycle. The report noted that the underwriting cycle is entering a period of uncertainty.
• Potential political changes. A changing state political environment may result in more legislative proposals. Mealy said the political situation in Washington, with proposals to revamp the nation's health care and financial regulatory systems, makes for a period of uncertainty.

Researchers highlight findings. Among the highlights of the report, NCCI researchers found that:

• The 2008 accident year combined ratio was 100 percent. Researchers said this is up four points from a revised 2007 projection. The current underwriting cycle topped out in 2006 with an 85 percent combined ratio -- more than a 58-point improvement since 1999.
• California made an impact on national numbers. As usual, NCCI said, California is large enough to have an impact on the countrywide workers' comp numbers, particularly when its results are substantially different than most of the other states, as they have been in recent years. In 2008, those differences remained on a calendar year basis but were not significant on an accident year basis. Excluding California, the report found, would increase the calendar year combined ratio by about five points to 106 percent. Excluding California from the accident year combined ratio would leave it unchanged at 100 percent.
• Frequency continued to decrease. As expected with the economic slowdown, the report found that frequency continued to decrease in 2008. For states in which NCCI makes filings, the frequency change was -4 percent. The prior year's change was -2.6 percent. The organization's research indicated that the recession is placing additional downward pressure on frequency.
• Net written premiums declined. Net written premiums, including the state funds, had a third year of decline in 2008, dropping more than 12 percent to $39 billion. The private carriers, the report found, dropped by about 10 percent to $34 billion. This is the largest drop in workers' comp net written premium in many years, researchers said.
• Depopulation of the residual market continued at a rapid rate. Premium volume dropped about 30 percent in 2008 and is now about $700 million, or less than half the volume in 2004. Overall, the market share of the residual market pools serviced by NCCI for 2008 dropped to about 6 percent, down from 8 percent in 2007. Researchers said this is a great improvement from the 13 percent market share peak that was reached in 2004 for this cycle.

June 15, 2009

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