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Despite Favorable Pricing Trends, Profitability Challenges Persist in U.S. Workers' Comp Sector: A.M. Best

Posted on 13 Nov 2012 by Neilson

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AM BestThe U.S. workers' compensation line of business, which has faced significant challenges in recent years, received a respite in 2011 as employment and payrolls stabilized and overall net premiums written (NPW) increased by 10%, according to an A.M. Best Co. special report. The report, titled "Despite Favorable Pricing Trends, Profitability Challenges Persist," also found that overall underwriting results for the aggregated workers' comp line (as reported by those companies and state funds that have completed and filed the Insurance Expense Exhibit with A.M. Best) improved slightly, as the combined ratio declined to 117.8 in 2011, from 118.1 the previous year.

The premium growth of 10% in the workers' comp line in 2011 outpaced that of U.S. commercial lines, which saw a reported 4% increase in NPW for the year. In addition, the rise in NPW for the workers' comp line comes after five consecutive years of NPW declines, from 2006 through 2010, when a combination of competitive pricing, a series of consecutive rate increases (often related to statutory reforms), poor employment and challenging macroeconomic conditions put significant pressure on the sector.

However, A.M. Best expects that profitability for the workers' comp line will be challenged going forward despite a more favorable pricing environment, due to an increasingly competitive operating environment and the cumulative effect of rate increases. Details in the report also include:

--Despite the 10% increase in NPW in 2011, premium volume remains 23.8% lower than its peak of $49.2 billion in 2005.

--The largest workers' comp insurers remained unchanged for a third straight year, with Liberty Mutual Insurance Cos. retaining its top market position, followed by American International Group.

--Direct premiums written (DPW) increased in all but three jurisdictions, excluding those with monopolistic state funds. California, with the highest DPW in the United States, posted a 10.1% increase in 2011. Of the largest 10 states, New York has the highest percentage increase in DPW, at 14.8% in 2011.

--For the A.M. Best workers' comp composite, which consists of companies that write predominantly workers' comp insurance and includes state funds and experience for non-workers' comp lines of insurance, the combined ratio deteriorated slightly to 123.6 in 2011 from 122.2 in 2010, the highest recorded combined ratio for the composite over the past 10 years.