Fitch: WC combined ratio 'worst result in past 10 years'

Rising medical costs are putting a damper on the somewhat encouraging news about the workers' comp insurance line, according to Fitch Ratings.

While recent premium rate increases are welcome news, they will need to improve "significantly further for the market to reach an underwriting breakeven."

The Chicago-based company said the 2011 statutory combined ratio for workers' comp was 117 percent, 9.5 percentage points worse than the commercial lines aggregate for the year and the worst result for workers' comp in a decade.

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It noted that premium volumes have decreased by 23 percent since 2006. The report blamed price competition and the effects of the recession, among other factors.

"Recent premium rate increases in workers' compensation are an encouraging sign that the market has reached a cyclical bottom," said James B. Auden, managing director. However, "Fitch estimates that it will be difficult for the workers' compensation market to have a combined ratio of 110 percent or better in 2012 or 2013 without significantly more price improvement," due to rising medical severity.

The report said incurred loss ratios have increased sharply over the last five years, blamed largely on medical costs. "Workers' compensation medical severity increased by an annual average of 4 percent from 2007 to 2011, according to data from NCCI," the report said.

Reserve deficiencies from prior underwriting periods in the last three consecutive years were also generated. "Fitch believes that workers' compensation reserves at year end 2011 are one of the weaker segments from a reserve adequacy perspective for the property/casualty industry," Auden said, "and industry results will continue to be affected by unfavorable reserve development going forward."

Market share has shifted among individual writers over the past five years. State funds and residual market facilities "continue to shrink their policy count," according to the report, "and American International Group, Inc., has significantly reduced premium volume. Companies that have increased market share in workers' compensation recently include Travelers Companies Inc.; Hartford Financial Services Group, Inc.; and W.R. Berkley Corporation."

Read more at the WorkersComp Forum homepage.

July 16, 2012

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