U.S. Workers Comp Market to Report Strong Profitability in 2020: Fitch Ratings

Fitch Ratings has recently released a report that shows how the US workers compensation insurance market is positioned to report strong profitability in 2020.

Source: Reinsurance News | Published on November 10, 2020

Despite considerable economic challenges from the ongoing coronavirus pandemic, the declines in economic activity led to reduced claims frequency that are currently outpacing pandemic-related losses.

However, it’s been predicted by Fitch Ratings that underwriting performance in 2021 and beyond is set to deteriorate. This will happen as claims activity normalises with increased work-site business activity and premium revenue continues to fall amid recent underwriting exposure reductions and competitive pricing forces.

Workers’ compensation insurance has been the most consistently profitable segment in US commercial lines over the last five years, with a 91% average statutory combined ratio from 2015-2019.

Segment loss reserves have also exhibited unusual strength with favourable prior-year development of 15% of calendar year earned premium in both 2018 and 2019.

While events remain highly fluid, year-to-date overall workers compensation results remain favourable. The segment direct loss ratio remained unchanged versus the prior year first half at 50% in 1H20.

Reports are showing that claims frequency is down significantly, tied likely to the slowdown in economic activity, with sharp reductions in employee time spent at the work space.

The California Workers Compensation Insurance Rating Bureau (WCIRB) reported 2Q20 claims frequency versus the prior-year quarter down by 10% for indemnity claims and 33% for medical only claims.

Pandemic-related long term or catastrophic claims have also been limited to date. However, uncertainty remains regarding longer term health implications for more severe virus cases, including the potential for major organ damage and other chronic conditions that would ultimately increase workers’ compensation costs.

Pandemic-related cases represent 7.4% of year-to-date paid claims, 99% of which settled for payments of less than $10,000, according to the Florida Division of Workers’ Compensation’s recent 2020 COVID-19 Report.

Due to prior profitability, workers’ compensation is the only major commercial lines segment not experiencing significant premium rate increases. Segment direct written premiums in 1H2020 fell by 9% versus the prior-year period.

These volume declines are likely to continue in the near term, with underwriting exposure reductions, reduced employer payrolls and effects from negative premium audits.

Negative premium rate pressure may briefly pause amid current economic uncertainty but not meaningfully subside over the next few years. Future premium volume will also hinge on the pace of the economic recovery, with recognition that improvement in employment and wages will be uneven across sectors.

A return to prior claims frequency levels will also be influenced by the strength of the economic recovery. However, some of the broad socio-economic shifts in response to the pandemic may have a longer-term effect on workers compensation risk exposures and claims costs.

Greater use of telemedicine in case management, more prevalent work from home arrangements and reduced employee travel activity will affect the severity and frequency of claims.