“We are pleased to report solid overall results for the workers compensation line in 2007,” NCCI President and CEO Steve Klingel said. “However, NCCI continues to observe that a low interest rate environment, combined with the modest performance of the equity markets, have left the line with post-tax returns on surplus that are far below record levels—and these results barely return the industry’s cost of capital after the significant payments of federal income taxes.”
“Given the positive 2007 results, our short-term view of the market is optimistic,” added NCCI Chief Actuary Dennis Mealy. “However, our long-term outlook is cautionary due to the myriad of uncertainties that continue to face the business.”
NCCI reported that calendar year net written premium declined for private carriers for the first time in eight years. (It was the second straight year of premium declines for the line inclusive of the state funds.)
NCCI also reported that the 2007 accident year combined ratio came in at 92%. On an accident year basis, the current underwriting cycle peaked in 2006, with an 84% combined ratio (more than a 55 point improvement since 1999).
As NCCI pointed out in its 2007 “State of the Line” report, there is a significant impact on the countrywide numbers caused by the state of California. Excluding California would increase the calendar year combined ratio by about 5 points—to more than 104%. And, excluding California from the accident year combined ratio would raise it from 92% to about 97%.
Workers compensation insurance prices accelerated their declines in 2007. Significant reductions continued in California and Florida since the reforms in those states favorably impacted costs and improved marketplace conditions.
In other market analyses reported on by NCCI:
* Favorable frequency trends continued—and along with payroll increases, were more than enough to offset medical and indemnity claim cost increases. This resulted in bureau loss cost and rate filings that generally were downward last year, with a couple of notable exceptions.
* Although frequency continued its downward path during 2007, it did so at a slower rate than the last couple of years. For NCCI states, the frequency decrease for 2007 was 2.5%. (The prior two years had very large frequency decreases of almost 7%.) The 2.5% decrease in 2007 is closer to the longer-term trend for the frequency decline. Of note, NCCI has found that frequency tends to decline during periods of economic slowdown. Therefore, despite the ease from decline of previous years, the frequency decline should continue.
* NCCI’s estimates of the reserve positions of private carriers improved to about a $2 billion deficiency at year-end 2007. After consideration of the allowable discounting of the indemnity reserve of lifetime pension cases, the reserve position is fully adequate. This is in sharp contrast to the $21 billion deficiency at year-end 2001. Achieving reserve adequacy is one of the major accomplishments for the industry in the last five years.
* Depopulation of the residual market continued at an accelerating pace in 2007 and 2008. Premiums dropped to about $1 billion for Policy Year 2007, down from $1.2 billion in 2006. Overall, the market share of the residual market pools serviced by NCCI for 2007 dropped to about 8%, down from about 10% in 2006. This is a great improvement from the 13% market share peak that was reached in 2004 in this cycle.
* In late 2007, Congress reauthorized the Terrorism Risk Insurance Program for seven years with som