NCCI maintains 'precarious' market outlook while awaiting 2010 numbers
In the meantime, the Florida-based rating agency is sounding another cautionary tale for the line, based on the most recent information available. While the overall outlook for the property/casualty industry is positive, the workers' comp line "has shown significant deterioration overall," according to Stephen J. Klingel, president and CEO of NCCI Holdings. Klingel's comments were included in NCCI's Workers' Compensation 2011 Issues Report.
Among the most watched numbers for 2010 will be the combined ratio. Workers' comp was one of only two insurance lines, along with general liability, that showed an increase in combined ratio for 2009, up 9 points.
"Deteriorating underwriting results combined with a record low interest rate environment left the line in an only slightly better than break even position after investment income is considered," Klingel said. "In all, industry net written premium declined 23 percent over two years."
Part of the reason for the less than favorable outlook in workers' comp has to do with its direct ties to the labor markets. "The collapse in private sector wages and salaries accounted for a material portion of the 23 percent decline in workers' comp written premium," Klingel said.
Also, more than 40 percent of workers' comp premium is generated by manufacturing and contracting, which were hard hit by the recession. "NCCI estimates that this industry group's impact caused a 4 to 6 percent decline in workers' comp premium by itself."
Investment gains were up a bit in 2009, although nowhere near the 20 percent increases seen between 1997 and 2000. The combined underwriting loss with the investment gains produced a pretax operating gain of 1.6 percent -- the worst result since the 0.9 percent gain of 2003.
"Clearly, with investment returns at current levels, any significant underwriting loss will lead to an unsatisfactory bottom line result," according to the report. "This level of return underlines our conclusion that the market continues to reside in a precarious position."
Despite the challenges facing the workers' comp market, there are some reasons for optimism, according to NCCI. For one thing, smaller firms have a greater impact on the business cycle, since they tend to buy workers' comp policies with full coverage, as opposed to the self-insured and large deductible larger firms. As the economy improves, smaller firms are more likely to add more employees proportionally than larger firms, generating a bigger boost to workers' comp premium.
Also, there have been preliminary signs that the drop in workers' comp premium may have slowed, especially in manufacturing. However, construction employment remains stagnate.
There is additionally good news in terms of claims frequency, which continued to decline in 2009. In fact, NCCI revised its original estimate of a 4 percent decline in lost time claims per 100,000 workers, to 5.5 percent. The 2010 frequency will be telling, as many workers' comp stakeholders have predicted an end to the declines.
Another bit of good news ties in with the economy's effect on manufacturing and contracting, which typically have compromised more of the larger claims. Because of the drop in employment in these sectors, the average indemnity claim cost increased by an estimated 0.8 percent in 2009 -- compared to an increase of up to 5 percent in previous years.
Medical costs per lost-time claim also increased at a slower pace than in previous years, estimated at 5.4 percent in 2009.
Finally, there is the shrinking of residual markets, at least those managed by NCCI. For the sixth year in a row they have continued to depopulate.
Read more at the WorkersComp Forum homepage.
May 12, 2011
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