The U.S. workers’ compensation insurance sector continues to face an uncertain future as competitive pricing, further rate decreases, weak macroeconomic factors, and growing healthcare costs continue while claim frequency continued to rise in 2010 and early 2011, according to A.M. Best.
While the line is still dealing with the same issues in 2011, A.M. Best said there is some reason to be hopeful as premium growth appears to be on a positive track in 2011 for the first time since 2005.
However, in contrast to the positive premium growth A.M. Best said that conditions appear grim over the near term, with expectations that underwriting results will weaken further before they get better. At the same time, however, research by a pair of researchers at the University of california at Davis suggest otherwise.
Let's look at the A.M. Best report first on the current state of workers’ compensation. Other key findings in this report:
- Results for the workers’ comp line of business deteriorated sharply in 2010, with the calendar-year combined ratio increasing nearly seven points to 118.1, the highest level since 2000.
- Net premiums written (NPW) for the line fell for the fifth consecutive year in 2010. Premium volume has declined more than 30 percent since NPW reached its high in 2005. While NPW declined for most insurers, a number of companies saw an increase in 2010.
- The top five workers’ comp insurers ranked by NPW in 2010 remained unchanged, with Liberty Mutual Insurance Cos., American International Group (AIG), Travelers Group, Hartford Insurance Group and the State Insurance Fund of New York still leading.
- Through Sept. 15, 2011, negative rating actions outpaced positive rating actions in the workers’ comp segment by more than a 2-to-1 margin. In addition, there were eight rating units affirmed with negative outlooks during this time, and A.M. expects this trend to continue for the remainder of 2011.
New Study Contradicts A.M. Best
Skyrocketing workers' compensation claims payments are often blamed for rising premiums, but a UC Davis study, according to HealthCanal, has found that the number of claims has dropped during the past two decades. Published in the September-October issue of Public Health Reports, the study shows that higher premiums are instead associated with decreases in the Dow Jones Industrial Average and interest rates on U.S. Treasury bonds.
"Insurance companies appear to have been setting premiums according to their returns on the stock and bond markets, not according to the number of claims they have," said J. Paul Leigh, UC Davis professor of public health sciences and senior author of the study. "They invest because they need a financial cushion to pay for claims and, if they lose, raise premiums to recoup their losses, Leigh asserts.
The researchers found that while premiums increased from 1992-2007, claims decreased 1 to 2 percent each year. Claims for serious illnesses and injuries varied, but decreased overall.
The team also discovered that for the entire 35-year timeframe of the study, rising premium rates were closely linked with the Dow Jones Industrial Average or Treasury bonds. As either the Dow or interest rates on Treasury bonds fell, premiums rose, and vice versa.
Worker's compensation Background
Every state except Texas requires employers to provide workers' compensation coverage. In Texas, employers can choose not to cover their employees, but if they make that choice they are not protected from tort suits filed by injured employees.
Some states exempt from mandatory coverage certain categories of workers, such as those in very small firms, certain agricultural workers, household workers, employees of charitable or religious organizations, or employees of some units of state and local government. Employers with fewer than three workers are exempt from mandatory workers' compensation coverage in Arkansas, Colorado, Georgia, Michigan, New Mexico, North Carolina, Virginia, and Wisconsin. Employers with fewer than four workers are exempt in Florida and South Carolina. Those with fewer than five employees are exempt in Alabama, Mississippi, Missouri, and Tennessee.
