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Fitch Ratings, an international rating agency, recently issued a special report that examined issues facing workers' comp insurers and their potential impact on current ratings. According to the report, underwriting performance is expected to worsen in 2009 as rate reductions persist, albeit at a reduced pace. Researchers said workers' comp industry results have deteriorated in the last two years, after several years of favorable underwriting performance. A recent study by the National Council on Compensation Insurance found that the calendar year combined ratio for the industry remained at 101 percent in 2008, up from a low of 93 percent in 2006. In addition, Fitch noted that accident year results have declined as well, with the market reverting to an underwriting loss last year.

On a positive note, Fitch noted that it does not believe worker' comp market conditions will likely fall back to the dire levels of the late 1990s, when excessive competition and increasing loss costs resulted in a accident year combined ratio that peaked at 143 percent in 1999.

In addition poor underwriting performance, Fitch noted that loss costs, particularly medical-related expenses, continue to rise. However, the report said that these increasing costs have been moderately offset by claims frequency.

"One bright spot for workers' compensation, and most parts of the industry, is claims frequency is down significantly," the report stated. "Even a modest uptick in frequency with moderating severity can cause underwriting results to be worse than anticipated."

Impact of economy uncertain. Researchers noted that the impact of the economic recession on loss trends adds another degree of complexity and uncertainty for workers' comp underwriters.

"Workers' compensation business tends to be highly correlated to the economy in that insured exposure is primarily driven by insured payrolls" the report noted. "As employers expand in favorable times, workers' compensation exposures grow. Conversely, as we have seen more recently, as employers retrench in a difficult economic environment and cut payroll, this results in reduced workers' compensation volume and polices in force. In addition, the depth of the current recession is causing more commercial insurance buyers to shop policies around in order to cut costs, thus further increasing the competitiveness of the market."

Researchers said, however, there is no consensus on how the recession will ultimately impact loss costs.

"On the one hand, lower payrolls with more layoffs and increased unemployment could reduce overall claims frequency with a reduction of insured workers employed," the researchers said. "However, a reduced workforce could potentially increase accidents as workers are more stressed and safety and risk management measures are relaxed."

June 29, 2009

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