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Fitch: Workers' Comp Insurance Rate Increases Buoy Revenue Growth

Source: Business Wire

Posted on 11 Jul 2013 by Neilson

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FitchFundamentals in the workers' compensation insurance market have been steadily improving and should continue to lead to robust revenue growth, according to Fitch Ratings. Following a long period of declining premium rates, workers' compensation pricing has increased for two consecutive years with little sign that pricing trends will reverse in the near term.

Workers' compensation is the largest segment of all U.S. commercial lines, representing 18% of property/casualty industry commercial lines net written premiums in 2012. Workers' compensation has been the worst performing major commercial lines segment for some time. However, the 2012 industry aggregate segment combined ratio improved to 110% from 117% in the prior year. Fitch projects a 105% workers' compensation calendar year combined ratio in 2013.

In response to growing underwriting losses and pressure on profitability from lower investment yields, the broader commercial lines insurance market entered a hardening underwriting cycle phase in mid-2011. Premium rate increases have continued in the first half of 2013 and appear sustainable through the end of the year. Willis North America, Inc.'s most recent Marketplace Realities report predicts that workers' compensation rates will rise 2.5%-10% in 2013, with more than 20% increases projected in the underperforming California market.

Fitch notes that workers' compensation claims costs are influenced greatly by medical cost factors that tend to expand at a higher rate than general inflation. Healthcare costs in 2012 were a bit more stable than historical patterns, but sustainability of this trend is questionable given pending implementation of healthcare reform in the U.S. A return to economic stability is promoting a return to declining claims frequency trends.

Loss reserves in the workers' compensation segment have developed adversely for four consecutive years. Fitch's analysis suggests that the industry's loss reserve position in workers' compensation remains inadequate.

Given the prominence of workers' compensation as a percentage of many insurers' books of business, continued market hardening and underwriting improvements promote earnings stability that is viewed favorably from a credit perspective. Reductions in workers' compensation loss reserve deficiencies would also contribute to stability of insurer ratings at current levels.