Over the past five years, most large underwriters posted favorable underwriting profits in the workers’ compensation segment. In 2018, positive results were partly driven by the recognition of greater reserve redundancies, which totaled approximately 15% of segment earned premiums. But workers’ compensation is historically a cyclical and more volatile business, so a shift in the future is always a possibility.
Unprecedented success
Workers’ compensation is a recent outlier to other commercial lines segments with considerably better recent performance and also more negative pricing trends. While a number of commercial lines segments’ profits improved in 2018, property segments, due to reduced catastrophe-related losses, and workers’ compensation touted the lowest combined ratio of any major segment at 86.4%.
This result marks the fourth consecutive year of underwriting profits and represents an unprecedented level of success in modern times for workers’ compensation. Accident-year loss ratios show similar favorable results. The average loss ratio for accident years 2014-2018 was 69%, compared with a recent high of 87% in 2010.
Unsustainable future?
According to the Council of Insurance Agents & Brokers’ (CIAB) Commercial Property/Casualty Market Report, renewal rates in the workers’ compensation segment decline in each of the last 17 consecutive quarters. The 2019 first quarter survey showed a 3.3% rate decline. This rate movement contrasts sharply with a broad recent hardening of pricing in nearly all other commercial market segments, particularly property and auto lines. The CIAB reported a 3.5% improvement in overall commercial pricing for the first quarter of 2019.
Fitch Ratings notes that this divergence in pricing is reflective of distinct recent profitability differences in workers’ compensation versus other commercial lines products. Falling rates in workers’ compensation make recent profit levels unsustainable and create a greater vulnerability to more abrupt shifts in future claims patterns.
“The workers’ compensation segment is known for past periods of volatility, but recent experience represents an unprecedented level of underwriting success,” Gerry Glombicki, director of insurance at Fitch Ratings, said in a statement. “However all good things eventually come to an end, and these favorable underwriting profits are not sustainable in the long-term in light of competitive forces, recent price deterioration and potential for future claims trend deterioration.”