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Economy, Rates Boost Workers' Comp Premiums

Source: BestWire

Posted on 02 Nov 2012 by Neilson

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Workers CompAn improved economy and rising rates helped boost workers' compensation premiums 9.6% in 2011, the single largest increase since 2003 and the first positive growth since 2005, according to A.M. Best data.

As far as workers' comp premiums go, 2010 was the bottom of the market, said Brian O'Larte, senior financial analyst with A.M. Best Co.

The industry's total direct premiums written rose to $43.3 billion in 2011 from $39.5 billion in 2010, but was still down from the $46.7 billion written in 2008. The high water mark would have been $55.9 billion in 2005, according to BestLink, A.M. Best's online financial system.

A combination of rate increases, which accelerated throughout the year, along with payroll growth contributed to the growth in premiums. Premium audit returns, which represented a significant challenge to insurers in 2009 and 2010, declined in 2011 and some companies have reported increased premiums on audits during late 2011 and early 2012, O'Larte said.

As a result of the reduced premiums in recent years, a number of companies have started expense initiatives to reduce expenses, he said. "That alone will improve results," O'Larte said.

The industry's average combined ratio improved to 117.8 in 2011, down from 118.1 in 2010.

Robert P. Hartwig, president of the Insurance Information Institute, said workers' comp is currently the hardest of all major property/casualty lines.

"Workers' comp has undergone a remarkable transformation: from the fastest contracting of all major property/casualty lines to the fastest expanding property/casualty line," Hartwig said.

The line began to contract during the soft market, but the contraction was accelerated during the economic downturn of 2008 as payrolls were reduced and jobs lost, particularly in manufacturing and construction, he said.

"Now, average renewal data shows [workers' comp] renewals are up 8.35 in the second quarter, leading all commercial lines," Hartwig said. "When you combine that with 33 consecutive months of private sector hiring, payrolls are now higher than they were before the economic downturn," he said.

With the economy and salaries growing again, workers' comp premium rates are expected to see double-digit growth in 2012 "and trends point to similar growth in 2013," Hartwig said.

Among individual companies, Chubb grew its 2011 direct premiums by 21.26%, the largest margin of any insurer among the top 10 writers. It appears to be the largest increase in workers' comp premiums for the company since 2003. Chubb had a combined ratio of 93.4, which was the best among those top 10 writers (and the only one south of 100), according to BestLink. Chubb's combined was 94.8 in 2010. Chubb was the 10th largest workers' comp writer by 2011 DPW, down from the ninth largest in 2010.

Hartford grew its 2011 direct premiums by 19.4%, the second-largest margin of any insurer among the top 10 writers. It appears to be the largest increase in workers' comp premiums for the company since 2005. Hartford had a combined ratio of 109.8, which was the third best among those top 10 writers. Hartford's combined was 95.8 in 2010.

"Our growth in workers' compensation has been driven primarily through improved pricing and rates," Gary Thompson, executive vice president of middle market commercial insurance at Hartford, said. "In addition to the improvement in rate and price in the workers' compensation line, we continue to refine our underwriting support analytics, and we continue to upgrade our claim costs containment capabilities," he said.

Travelers is the second largest workers' comp writer by 2011 direct premiums written, and had a 14.6% increase in DPW year-over-year from 2010, the third largest jump of any writer in the top 10, and the largest increase for the company since 2005. Travelers' combined ratio was 104.7 for 2011, the second best among the top 10 writers, but up from 94.1 in 2010, when Travelers had the lowest combined ratio among the top 10 workers' comp writer.

Hartwig said rate increases are needed to improve underwriting results, and "history tells us this is usually a several year long process in workers' comp. It also often requires regulatory reform."

California recently adopted reforms that are expected to save businesses $1 billion in workers' comp losses in 2013 by making the system more efficient and cutting unnecessary spending.

In Oklahoma, Insurance Commissioner John Doak has been pushing lawmakers to provide some way of lowering workers' compensation insurance rates for businesses, particularly those near the Texas and Arkansas borders where Oklahoma costs run much higher. 

The top five writers of workers' compensation by 2011 net premiums written were: Liberty Insurance Insurance Cos., American International Group, Travelers Group, Hartford Insurance Group, and the State Compensation Insurance Fund of California, according to BestLink.