Workers’ Comp Writers Looking to Improve Profitability

Workers' compensation writers are taking steps to improve the profitability of the troubled line, industry experts said.

Source: Source: A.M. Best - Meg Green | Published on February 28, 2012

From 2006 to 2010, workers' compensation premiums fell by about 30%, while profitability dropped, said Ed Keane, senior financial analyst at A.M. Best Co.

"Rates are clearly underwater," said David Sandler, chief operating officer of U.S. casualty for American International Group's Chartis, the second-largest workers' comp writer.

AIG has shrunk its overall workers' comp book from $6.73 billion in 2006 to $3.13 billion in 2010. A large chunk of that stemmed from the guaranteed cost market, specifically specialty workers' comp of $250,000 in premiums and smaller, where AIG has shrunk its book from about $3 billion to $3.5 billion in 2005-2006 down to $650 million to $700 million in 2012.

"We've been pulling back because we think the business is underpriced. That book is priced as high if not higher than it was in 2005 to 2006," said Sandler, "but we are getting a result that is dramatically worse. You can't get the rates you need."

The general drop in workers' compensation premium was driven by a combination of factors including rate decreases, competitive market conditions, return audit premium and a weak macroeconomic environment, Keane said.

Only 45.4% of Americans had jobs in 2010, the lowest rate since 1983 and down from a peak of 49.3% in 2000, according to the U.S. Census.

Another factor impacting the drop could be the growth in large deductible programs and captives, Keane said.

Workers' comp premiums fell 34% to $32.2 billion from year-end 2005 to 2010, while the industry's loss and loss-adjustment expense ratios ticked up every year, rising from 74.5 in 2006 to 87.9 in 2010, according to BestLink.

The workers' comp industry's combined ratio for 2010 was 116.8, and A.M. Best Co. is estimating a combined ratio of 118.5 for 2011 and 120.5 in 2012, which would be the highest since the industry recorded a 120.9 in 2001.

One challenge facing the line is it is heavy regulated, Keane said. "You're not going to be able to get rate increases as often as you do in other lines," he said.

Harry Shuford, chief economist with NCCI Holdings Inc., said from 2007 to 2009, workers' comp premium fell 23%. Of that 23%, 7% was due to changes in bureau rates and loss costs, while four other factors were each responsible for a 4% drop: reducing in carrier pricing; decline in total payroll; the adverse impact on manufacturing and contractors; and that smaller companies were hit harder by the economy than larger companies.

Contractors and manufacturing account for 20% of workers' comp payrolls, but 40% of premiums, due to the risker nature of the business, Shuford said. Smaller companies tend to buy workers' comp from the first dollar, while larger companies are more likely to have large deductibles, he said.

Workers' comp "in general, is very challenging," said Sandler. AIG had been the largest writer of workers' comp in 2007, but fell to the No. 2 largest writer in 2008, a position it holds today.

Sandler said the market can be divided into the smaller guaranteed-cost market of $1 million or less premium, which is heavily regulated by filed rates and class codes, and the larger, national accounts that have more price flexibility.

AIG and other companies are experimenting with predictive modeling, to get a sense of what types of accounts may perform better than others. "The only way you can survive is if you get better at risk selection," Sandler said.

Price increases in the large deductible national market in the 10% to 12% range, but that may not include deductible increases and other terms and condition changes, he said.

Sometimes a deductible increase can be as or more effective than a straight rate increase, Sandler said.

"The further away from day-in and day-out losses the better it is for the company. In the comp line, the more risk that gets transferred to the carrier the worse it is for the carrier," he said.

"There's no question that the price levels in the market in 2010 were grossly inadequate," said Christopher Cunniff, senior vice president of workers' comp at Liberty Mutual Group, the largest U.S. workers' comp writer. With today's low interest rate environment bringing 3% to 4% yields, "in order to get a reasonable rate of return of even 7%, workers' comp carriers should be writing to a combined ratio of 100 or below," he said.

2011 saw premiums beginning to rebound, Cunniff said. "There were more increases than decreases," he said. "Many companies are reporting pricing going up 5% to 10% in the second half of the year," he said.

But for companies to earn a reasonable rate of return, rates will have to continue to rise "significantly" in 2012, he said.

There's reason to be concerned about loss trends.

Because of the large number of unemployed workers looking for jobs, companies tend to have fewer vacancies, which means fewer opportunities for injured workers to return to the job in a different capacity while they heal, Cunniff said.

Also, insurers are worried about the potential for medical inflation. "Workers' comp is a long-tail line, and any increase in medical inflation puts extreme pressure on the line," Cunniff said.

And with the economy starting to warm up, hiring is on the rise. While that might mean larger work forces and higher premium volume, it also brings the risk of more claims, Cunniff said.

Shuford said the downward pressure on rates has ended. "There's not much upward pressure, but at least the downward pressure has gone away," he said.

Also, employment and payrolls have stabilized and premium growth is on track to be positive in 2011 for the first time since 2005, A.M. Best said.

Other interesting trends show that Travelers, No. 3 largest writer, has done better the industry, dropping its adjusted loss ratio from 73.14 in 2006 to 59.09 in 2010. Travelers has also bucked the decreasing premium trend, and grew its business from $2.79 billion in 2006 to $2.8 billion in 2010. Travelers is the only company in the top 10 that can make that claim.

The No. 4 largest workers' comp writer, Hartford, has also performed better than the industry, dropping from 68.89 in 2006 to 59.06 in 2010. Travelers and Hartford declined to comment.

Two residual markets — New York and California — remain in the top 10 workers' comp writers, although the California fund has fallen from No. 3 in 2006 to 7th in 2010, according to BestLink.