The U.S workers’ compensation insurance market reported strong underwriting performance for the third consecutive year in 2017, with an industry statutory combined ratio of approximately 92%, according to Fitch Ratings.
However, Fitch warns that a steady decline in premium rates from increased competition will ultimately lead to weaker underwriting results.
Fitch believes that while the industry may still generate underwriting profits this year, workers’ compensation results will move toward break-even in 2019, with low visibility of longer term projected results due to historical performance volatility.
Positive performance drivers include underwriting exposure growth, continued falling claims frequency rates and conservative reserve levels.
Past underwriting and pricing actions and relatively stable loss trends were noted to have positively influenced recent market performance.
Recognition of greater reserve redundancies in 2017 also partly drove results, which totaled ~12% of market earned premiums.
It’s believed favorable loss reserve redundancies will materialise for the next few years but to a lesser degree than in 2017.
Fitch says factors that can negatively affect future industry performance include premium rate pressure, increasing medical loss severity and erosion of past reform benefits in key states.
It’s also noted that market direct written premium volume in 2017 declined by 30 basis points (bps) from the prior year to $56 billion, representing the first year of lower market premiums since 2010.
Net written premiums fell by 1.3% during the same time, mainly due to larger reinsurance cessions. Premium revenue weakness, along with greater technology-related spending, has led to higher expense ratios, which have risen two points since 2014 for the industry.
Fitch adds that workers’ compensation premium growth will continue to lag other commercial lines segments due largely to divergent pricing trends.
According to the Council of Insurance Agents & Brokers’ quarterly Commercial Property/Casualty Market Index Survey, renewal rates in the workers’ compensation segment declined in each of the past 13 consecutive quarters.
Fitch maintains a negative sector outlook for U.S commercial lines insurers largely due to increased competition and the effect on near-term profit expectations.
Most commercial insurers in Fitch’s rated universe have stable rating outlooks. Favourable experience in workers’ compensation has partially offset weaker recent results in other key segments. Underwriting profits in commercial lines overall would influence a return to a stable sector outlook.
