A.M. Best: Another sobering report on WC system, but glimmer of hope
While saying "conditions appear grim over the near term" and "A.M. Best expects underwriting results to weaken further before they get better," the report says there are some positive signs. Overall, however, the report reiterates what similar reviews of the line have said recently -- that the workers' comp system continues to face substantial challenges.
Among the factors impeding growth in the workers' comp line are competitive pricing, further rate decreases, weak macroeconomic factors, growing medical costs, and an uptick in claim frequency. "As a result, premium volume declined and underwriting results deteriorated, again."
A.M. Best notes the following developments for 2010:
- Net premium written fell for the fifth consecutive year, declining 3.6 percent to $34.1 billion. Best says net premium written has declined more than 30 percent since 2005. Reasons cited are pressures from competitive market conditions, further rate reductions in most states, return audit premium, and weak macroeconomic conditions that caused payrolls to languish. Also, self-insurance, large deductible programs, and captives have had a negative impact on premium volume. The economic downtown has severely impacted manufacturing and contracting sectors, "which tend to be significant contributors to premium volume in the workers' comp line."
- The calendar year combined ratio deteriorated in 2010 with a nearly seven-point increase to 118.1 -- the highest level since 2000. Best projects it to "deteriorate again in 2011, increasing more than 3 points to 121.5."
- Negative rating actions outpaced positive rating actions by more than a 2-to-1 margin.
Additionally, the report says medical costs for lost time claims continue to outpace the medical consumer price index. The report cites NCCI data saying the average medical cost of a lost time claim has increased by 95 percent in the last decade, from $14,200 in 2000 to $27,700 in 2010.
"A.M. Best expects the severity of workers' comp claims to maintain its upward trend over the long run because of the sustained increases in indemnity and medical claim costs, as well as inflationary pressures," the report says.
A.M. Best says the top five workers' comp insurers ranked by net premium written in 2010 remained unchanged. They are:
- Liberty Mutual Insurance Companies.
- American International Group.
- Travelers Group.
- Hartford Insurance Group.
- State Insurance Fund of New York.
While most insurers saw NPW decline, several experienced an increase in premium volume. Meadowbrook Insurance Group had the highest year-over-year increase in 2010, at 41.4 percent. Others that saw increases included Farmers Insurance Group and Berkshire Hathaway.
The report does predict some positive news for the industry. "The workers' comp industry has some reason to be hopeful because premiums declined at a materially slower rate in 2010, driven by rate increases in certain states and, to a lesser extent, the slower economic recovery. As the economy continues to recover in 2011 and beyond, payrolls and employment levels will continue to increase gradually, providing a boost in workers' comp premium volume."
Best says it "expects NPW in the line to reverse its five-year downward trend and increase approximately 8 percent in 2011."
The report concludes with some advice. "Like other industry segments, workers' comp writers will need to focus on disciplined underwriting, adequate pricing and reserving, and prudent capital management to weather the current market environment and be better positioned to succeed."
Read more at the WorkersComp Forum homepage.
November 3, 2011
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