Workers’ compensation insurers’ underwriting results continued to outpace the rest of the U.S. P&C commercial sector in 2022, as they benefited from the “long-term decline in workplace accidents and a reduction in fraudulent claims,” according to AM Best.
These comments stem from the Best’s Market Segment Report, in which the firm suggested that favourable prior year loss reserve development continued to bolster the insurance industry’s carried loss reserve position in 2022, owing to the long-term declines in claims frequency.
“The workers’ compensation segment has experienced a softer market compared with other commercial lines of coverage, particularly auto and general liability,” the rating agency explained.
As per AM Best, the segment reported a combined ratio of 87.8% in 2022, almost 15 percentage points lower than the overall P/C segment’s 102.4%.
“The segment’s combined ratio for 2022 includes favourable loss development on older accident years totalling $6.5 billion, which reduced the reported combined ratio by approximately 13.5 percentage points,” the rating agency said.
It continued, “The segment, in which premiums are based on payroll levels, has benefited from the largest U.S. wage growth in over 25 years, coupled with strong job growth, which has helped increase its overall premium to pre-pandemic levels.
“Medical and indemnity severity increased, but the magnitude of these increases was less than the increase in wages. The higher payroll exposure base for workers’ compensation insurance kept the increase in claim severity manageable.”
Workers’ compensation written premium has also benefited from the “consistent rise in demand for labour” (following a drop in the unemployment rate from the April 2020 peak of 14.7%), as evidenced by 9% year-over-year increases in direct premiums written (DPW) and net premiums written in 2022.
AM Best suggested that in the first quarter of 2023, the segment’s DPW was up by 4.7% over the same period in 2022, a little more than half the 8.5% increase from the first-quarter of 2021.
The report also noted that workers’ compensation pricing has declined since 2015, except for the post-pandemic period from the second quarter of 2020 through 2021, when modest increases became the norm.
AM Best added, “The segment is still subject to a number of factors with longer-term implications on operating performance. Workers’ compensation remains susceptible to rising inflationary pressures. Higher wages have driven indemnity costs up, resulting in a modest increase in claims severity.”
David Blades, associate director, Industry Research and Analytics, AM Best, said, “Some market observers expect wages and health care costs to rise faster than inflation within another year or so.
“This could weaken reserve adequacy and temper the possibility of further improved underwriting results because of higher-than-expected claims from prior accident years.”
