Despite a decade of strong profitability, Laure Forgeron, Chief Underwriting Officer for Casualty at Swiss Re, a global reinsurance company, highlights emerging risks such as rising medical costs and intense competition in states like California, urging insurers to adopt disciplined strategies alongside evolving market conditions to sustain long-term financial health.
The National Council on Compensation Insurance (NCCI) recently reported continued robust performance in 202, marking the tenth consecutive year of underwriting profitability for private carriers.
However, Forgeron emphasises that maintaining discipline is essential: “While the WC market continues to exhibit some favourable characteristics, our analysis from the perspective of a reinsurer that is engaged in this market indicates the need for a heightened level of diligence.”
Various potential risks and challenges have surfaced, requiring careful attention from re/insurers to protect and reinforce their portfolios’ performance.
Medical inflation, previously moderate, has re-emerged, driven primarily by rising hospital costs and increased post-COVID utilisation.
Forgeron points out that despite significant reserve redundancy, recent reserve releases have masked underlying deterioration in Accident Year combined ratios (CoR).
She also notes that fierce competition in states like California has resulted in substantial premium rate reductions and a softer market, raising concerns about pricing and increasing loss ratios.
Forgeron further highlights that a tight job market with low unemployment often leads to the hiring of less experienced workers, potentially causing more first-year injuries in certain industries.
Additionally, safety improvements that have reduced workplace injury frequency over recent decades may be levelling off, potentially limiting future gains in this area.
Given the prolonged pressure on premium rates amid favourable conditions, Forgeron asserts that the industry now faces emerging challenges that necessitate pricing discipline to avoid unsustainable developments.
Re/insurers, having relied on the workers compensation market (WC) for consistent profits over an extended period, should adopt a more cautious approach to mitigate negative impacts.
Ensuring that underwriting practices align with the evolving risk landscape will be critical for maintaining financial health.
Forgeron explains that workers’ compensation insurance, mandatory for most US businesses, provides coverage for medical expenses and lost wages due to workplace injuries.
Annual premiums are estimated at USD 55-60 billion, with about 20% ceded to reinsurers. Due to consistent profitability, some primary insurers retain favourable risk by ceding premiums to their own captives, reducing cessions to the broader reinsurance market.
Forgeron notes that the WC reinsurance sector primarily uses excess-of-loss policies to manage volatility, despite longer-term risks like medical cost inflation.
Consequently, reinsurance WC market loss ratios have averaged 2 percentage points higher than those of the primary market over the past decade.
Meanwhile, WC Cat covers have seen profitability due to the absence of large-scale catastrophic events but require significant capital for low margins.
“For much of the past 50 years, the US workers’ compensation market exhibited strong cycles driven by not only the macroeconomic environment but also regulation. In the early to mid-1990s, for example, reforms of the workers’ compensation market helped improve loss ratios,” stated Forgeron.
Forgeron continued: “Hardening re-emerged after the 9/11 terrorist attack, which itself had a substantial direct impact on workers’ compensation claims in New York and nearby states. Changes to workers’ compensation insurance laws in places like California also helped to drive loss ratios lower.”
She further notes that the past decade has seen stable loss ratios in the workers’ compensation insurance market due to an improved risk landscape.
This stability has led to the longest period of profitability, with loss ratio reductions balancing out premium declines from favourable business conditions.
Workplace safety improvements, enhanced claims handling, and managed care networks have reduced accidents and expedited injured workers’ return to work.
Reserve releases have kept Calendar Year combined ratios below 100% since 2015, averaging under 90% in the last six years. The COVID-19 pandemic’s shift to remote work and hybrid models has further lowered claim frequency.
Forgeron also highlights that better data and analytics in underwriting and claims management have contributed to these positive results.
The National Council on Compensation Insurance’s 2023 report shows a 1% premium increase, an 86% combined ratio for private carriers, and significant decreases in lost-time claim frequency.
Despite strong performance, challenges loom. Increased competition has pressured premium rates, which have fallen for ten years, leading to Accident Year combined ratios exceeding 100%.
This has been masked by reserve releases, with a redundancy of USD 15 to 18 billion, potentially risking unsustainable performance.
While favourable loss ratios have benefited the industry since 2012, recent trends show smaller improvements.
Medical inflation is projected to rise due to higher healthcare wages, increasing costs despite medical fee schedules.
Workforce payroll growth has outpaced WC medical severity, but this advantage may fade.Low unemployment and a tight labour market lead to hiring less experienced workers, increasing claim frequency, especially in construction and service industries.
Forgeron stated: “According to a study by the Workers’ Compensation Insurance Rating Bureau of California (WCIRB), employees in their first year of tenure are more than twice as likely to have a claim compared to the state-wide average.”
Workplace safety improvements have plateaued, but new AI-driven technologies could reignite progress. “With these developments, Swiss Re is taking a cautious approach going forward to help sustain the commercial success achieved in this line of business over the last decade,” added Forgeron.
Each state sets its own rates and benefits, with four using state funds and others offering a mix of private insurance, self-insurance, and state funds. Most states allow private insurers to operate, fostering competition.
Costs for WC insurance vary by state and industry, with advisory rates set by regulators. Insurers often use discretionary credits to competitively reduce policy costs for employers.
Performance and trends in WC insurance differ widely among states. Large states like California, New York, and New Jersey face particularly challenging loss ratios due to intense insurer competition.California’s average premium rates have dropped significantly in recent years.
Forgeron advises caution amid evolving market dynamics. Enhanced data analytics have improved risk assessment and safety, but underlying Accident Year combined ratios may worsen due to external factors.
The cyclical nature of the market suggests it may be approaching a turning point. Despite developments and benefits from a higher yield environment, the soft market is expected to persist in the near term, with potential for stabilised margins as insurers balance risk and return.
