NCCI today released its annual State of the Line "By many measures, the industry condition is indeed improving," said NCCI President and CEO Steve Klingel. "While we are pleased to see that the positives are beginning to outweigh the negatives, there remains great opportunity for improvement. Our optimism is tempered by knowing that external forces such as the economy, healthcare reform, and new legislation may still negatively affect the market. But for now, we view the overall industry condition as encouraging."
"The workers compensation line continues to deal with a variety of significant challenges. These include poor underwriting results, low investment yields, and continued uncertainty regarding the impact of the implementation of the federal healthcare reform bill," added NCCI Chief Actuary Dennis Mealy. "But despite the long-term challenges, workers compensation saw some positive developments in 2012. Premiums grew for the second consecutive year, the combined ratio declined six points, and claim frequency continued to improve at a pace slightly greater than its long-term historic rate of decline."
As noted above, the workers compensation calendar year combined ratio for private carriers was 109 for 2012. Although a 109 combined ratio is far from satisfactory, the decline is welcome. And the accident year combined ratio experienced a similar six-point improvement. NCCI estimates that the accident year combined ratio for 2012 is 108, following 114 in 2011.
In other good news, lost-time claim frequency improved significantly in 2012-down 5% on average in NCCI states. The 5% decline is slightly larger than NCCI's long-term annual estimate of a of 2-4% decline per year. Previous NCCI research indicated that distortions in the calendar year premium data resulting from the recession and subsequent recovery affected our measure of claim frequency for 2010 and 2011. Current research indicates that those distortions are no longer significant for 2012.
Other market indicators/trends highlighted in NCCI's 2011 State of the Line report include the following:
- Net written premium (including state funds) increased to $39.63 billion in 2012. This 9% increase follows an 8% increase in 2011. This is a welcome shift following the cumulative 27% decline in premium from 2006-2010.
- The impact on premium of changes to bureau loss cost/rate filings was about 2 percent in NCCI states for 2012. For 2013, the impact of bureau loss cost/rate filings is basically flat in NCCI states. In the last filing cycle, NCCI filed 25 increases and 13 decreases, mostly for effective dates in 2013. Carrier discounting from bureau loss costs and rates declined about 2.5% in 2012 in NCCI states. About 40% of the increase in premiums in 2012 can be attributed to increases in bureau loss costs and rates, and the decline in carrier discounting.
- The private carrier reserve position continued to deteriorate in 2012 for the fifth consecutive year. NCCI's estimate of the reserve position for the private carriers as of Year-End 2012 is a $13 billion deficiency.
- Investment returns for the workers compensation line remained strong. For the third consecutive year, the ratio of investment gains on insurance transactions to premium was at or above 14%.
- Investment results combined with underwriting results produced a workers compensation pretax operating gain of 5% for 2012. This is in-line with the industry's long-term average, and a welcome improvement following three years of near-zero operating gains or losses.
- In NCCI states, the average indemnity cost per lost-time claim increased a modest 1% in 2012, after increasing 2% in 2011 and declining 3% in 2010.
- The average medical cost per lost-time claim increased by 3% in 2012 after increasing 3.6% in 2011 and increasing 1.4% in 2010. Combined, the total lost-time claim cost increased about 2% in 2012, which is about the same rate as the change in average wages.
- The workers compensation residual market experienced significant growth in 2012. Premiums grew by close to 50%, and the average market share in the residual market increased from 5% to 7%. The pace of growth is continuing into the first quarter of 2013.
- Although the volume of business in the residual market is growing as the market tightens, the combined ratio actually improved from 117 in Policy Year 2011 to 112 in 2012. The total underwriting loss in the residual market pools serviced by NCCI was $99 million for Policy Year 2012, up slightly from the $85 million in 2011.
Looking Ahead
In 2012, the workers compensation line showed some signs of recovery. Results improved materially, including the following:
- The combined ratio for workers compensation improved for the first time since 2006
- Premium grew for the second consecutive year
- Claim frequency declined significantly for the first time since 2009
- Claim severity increases remained modest
Even with the improvements, workers compensation is faced with some ongoing challenges:
- The combined ratio, while lower, still remains too high
- Slow growth in employment, particularly in the manufacturing and construction industries, is impeding additional premium growth
- In addition, the impact of the implementation of the Patient Protection and Affordable Care Act in 2014 looms as a huge uncertainty for the line