A.M. Best: Stage set for continued improvement over the next year
The report from A.M. Best looks at 20 state funds. The authors excluded the monopolistic funds in North Dakota, Ohio, Puerto Rico, Washington, and Wyoming.
"NPW increased 7.1 percent in 2011 and 13.5 percent in 2012, reaching $6.9 billion last year, the group's highest level since 2008," the report says. "Overall, it appears as though 2010 marked the end of the recent cycle for the state funds."
As the report explains, the funds compete for workers' comp business and often also serve as the markets of last resort in their respective states. The latest results are not wholly unexpected.
"Typically during hardening markets, some businesses find it more difficult to afford or secure coverage in the voluntary market and turn to state funds," the report says. In 13 of the states, the NPW increases were in double digits.
The numbers for the last two years represent the first increases in state funds' NPW since 2004. Three states bucked the trend, however. Montana, Missouri, and California had decreased NPW last year.
California's 10.8 percent decrease in NPW skewed the overall results. Removing the California State Compensation Insurance Fund from the list results in overall increases in NPW of 18.3 percent in 2012 and 11.7 percent in 2011.
The continued "highly competitive workers' comp market in California, the state's higher than average unemployment rate, and the effects of the company's internal restructuring initiatives over the past several years to improve operating efficiencies and underwriting results" have largely contributed to the decreasing NPW in the California state fund, the authors explain. Also, legislative reforms enacted between 2002 and 2004 effectively reduced rates and increased capacity in the California marketplace, making it easier for more companies to obtain coverage in the private market.
Additional findings include:
- State funds' net writings accounted for 16.6 percent of total workers' comp written in 2012. In seven states, the state funds had market shares of at least 50 percent, and in all but Pennsylvania, the state funds ranked first based on direct premiums written.
- The calendar year combined ratio for the funds was the lowest since 2008. The combined ratio of 125.5 was down from 134.9 in 2011.
- The current accident year combined ratio was 124.5 in 2012, down from 128.1 in 2011 and 129.1 in 2010. Those were the first annual declines since 2005.
A factor that could impact the state funds is whether they will continue to enjoy their tax-exempt status. The Internal Revenue Service is in the midst of an investigation, and depending on the outcomes, it "could have significant impacts on affected state funds' markets, business strategies and operations," the report said.
In terms of overall trends for the workers' comp line, the report listed the "positives" as the improving premium rate environment, generally moderate increases in loss costs, and an adequate capital position. Concerns for the line include the sluggish improvement in the economy, the low interest rate environment, continued high levels of underwriting losses, the potential for adverse loss-reserve development and the uncertainties of health care reform.
"Rate increases and anecdotal reports of more stringent application of underwriting and pricing criteria indicate that the stage has been set for continued improvement in underwriting and overall operating performance over the next year," the report says. "However, much will depend on the sustainability of recent operating trends, including favorable levels of prior year loss reserve development as well as a stable macroeconomic environment. If the past is a good indicator of the future, the state funds are likely to see more significant growth than the rest of the workers' comp industry in 2013."
By Nancy Grover
Read more at the WorkersComp Forum homepage.
August 19, 2013
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