According to a new AM Best report, annual underwriting profit in the U.S. workers’ compensation line of business has averaged $4.8 billion over the last five years and totaled nearly $24 billion during that time period—a level of profitability unmatched by any of the other major property/casualty lines of business.
The AM Best’s Market Segment Report, “Workers Compensation Generates Solid Profits but the Future Remains Uncertain,” shows direct premium volume rebounding to $52.2 billion in 2021, following a sharp drop in 2020. The segment’s net loss ratio has ranged from 45.4 to 49.0 in the most recent five-year period, reflecting the benefits of workplace safety and legislative changes that have reined in workers’ compensation claims costs as the frequency of claims continues to decline. During the period, the combined ratio remained between 86.2 and 92.2, reaching 87.9 in 2021. The positive calendar-year results were driven by strong favorable loss reserve development for workers’ compensation, which was the primary reason for the entire property/casualty industry’s favorable reserve development.
The report claims that what appear to be redundant reserves pave the way for more favorable development in 2022. Furthermore, unemployment was 3.5% in September 2022, down from 5.4% in 2021, and these indicators point to a continued rise in workers’ compensation premiums through the end of 2022, but this will be contingent on other economic factors. “Inflation could disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a commensurate increase in employee wages, rate increases may be necessary to cover the gap,” said Christopher Graham, senior industry analyst, AM Best. “Inflation could also necessitate companies further sharpening their risk management and loss control efforts to limit claims frequency.”
AM Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite, which is composed of U.S. companies, including state funds, whose workers’ compensation and excess workers’ compensation net premiums constitute 50% or more of their total net premiums. As of the end of 2021, these specialists accounted for almost 35% of overall industry’s workers’ compensation net premium volume, up notably from just under 30% in 2011. Net income for this population has been consistently solid, at more than $3 billion each the past six years.
“Although net income remains strong, it has not been growing, even as policyholders’ surplus has,” said David Blades, associate director, AM Best. “This has led to a drop in after-tax return on equity the past two years. Calendar-year 2022 will provide more guidance on the ROE: Will the current, lower return level persist or will the composite’s ROE strengthen and meet or exceed pre-pandemic levels?”
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=325081.
AM Best is hosting a briefing on the workers’ compensation market on Monday, Nov. 7, 2022, at 1:00 p.m. (EST). Senior AM Best analytical staff and leading industry experts will the state of the workers’ compensation market and emerging trends in underwriting, reserving and claims. To register, please visit AM Best’s Briefing – The Workers’ Comp Market: What to Expect in the Year Ahead.