Economy still doing a number on comp system, underwriting results indicate

More than two-thirds of jurisdictions studied have combined ratios above 100 percent. That's not surprising given what's been happening in the workers' comp system, according to an actuary from the National Council on Compensation Insurance.

"It's consistent with our State of the Line [report] we rolled out in May," said Barry Llewellyn, NCCI's senior divisional executive for regulatory services. "Observed results have deteriorated over the last few years."

Llewellyn commented after NCCI's recent release of its Calendar-Accident Year Underwriting Results by State 2009. Of the 37 states included, 26 had combined ratios above 100 -- meaning the premium collected was not adequate to pay the losses and expenses.

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According to NCCI, the calendar-accident year experience "reflects premium transactions occurring in a given year, along with loss experience for claims with accident dates beginning January 1 and ending December 31 of that year," in this case, 2009. "Calendar-accident year underwriting results measures the adequacy of premium funds to cover both benefit costs and operating expenses of the benefit system."

Of the 37 jurisdictions included, the 11 with combined ratios at or below 100 were: Alaska, Texas, Arkansas, the District of Columbia, Hawaii, Missouri, Kansas, New Mexico, Alabama, Nebraska, and Mississippi. Those above 100 were: Indiana, Virginia, Nevada, Maine, South Dakota, Vermont, South Carolina, Louisiana, North Carolina, Tennessee, Utah, Montana, Oklahoma, Idaho, Iowa, Florida, Kentucky, Illinois, Arizona, Maryland, New Hampshire, Connecticut, Georgia, Colorado, Oregon, and Rhode Island.

Several factors may account for the negative underwriting ratios among the majority of the states, according to Llewellyn, including:

Expense ratios are up.
Premiums are down.
Severity has been increasing.
Frequency hasn't been declining as much as it was in the past.

"The cost of claims has been going up persistently for a number of years," Llewellyn said. "In the past, that's been offset to a greater degree because frequency had been declining year after year. What's beginning to happen on a national basis is frequency is still down but not as far as it was."

Additionally, premiums have gone down dramatically, especially in hard-hit industries such as construction. At the same time, expenses as a percentage of overhead have increased.

"In Rhode Island, for example, the expense ratio went up 3.5 points from 2008 to 2009, and if you go back to 2005, it went up more than 10 points," Llewellyn said. "That's a direct hit on the combined ratio."

Rhode Island had the highest combined ratio of the 37 states, at 126. "It's had a combined ratio above 100 for the last five years," Llewellyn said. "In 2009 it went up 13 points, and in the prior three years, it was more than 110."

Llewellyn said they're watching to see what happens next. For the immediate future, there may be more pressure on premiums because there's evidence some insurers are trying to be more competitive on price.

As businesses emerge from the recession, frequency may increase. "Our research suggests when economies improve businesses hire people with less experience who tend to have more accidents," he said.

Read more at the WorkersComp Forum homepage.

January 10, 2011

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