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Workers Comp Writers Saw Double-Digit Premium Declines in 2008

Source: AM Best

Posted on 15 Sep 2009

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The top U.S workers compensation writers saw double-digit declines in direct premiums written in 2008, in what analysts describe as the biggest drop in decades.

According to a recent A.M. Best Statistical Study, the top 25 writers saw an average 15% fall in direct premiums written, slightly worse than the 14.4% recorded for all workers compensation insurers. Among the study's findings is that Liberty Mutual Insurance Cos. replaced American International Group (AIG) as the largest insurer in this line of business, a status Liberty Mutual achieved by suffering a shorter fall (-5.8%) than AIG (-25.9%).

Recession-related factors including a soft market, the financial crisis and a lack of job growth contributed to the worst DPW decline in decades, said Dennis Mealy, chief actuary for the National Council on Compensation Insurance.

"Over half of the premium in workers comp comes from manufacturers and contractors," Mealy said. "That's where the exposure is."

The state funds of both California and New York -- which rank sixth and seventh in the nation in DPW, respectively -- suffered drops of more than 20%. As markets of last resort, those funds will see rougher returns, Mealy said.

California's higher-than-national unemployment rate -- 11.9% in July -- took a significant toll on premiums in 2008, resulting in a 27.7% decline, said Emily Gorin, a spokeswoman for the State Compensation Insurance Fund. While the state fund holds a nearly one-quarter share of the state's workers compensation market, traditionally it has represented many new businesses, which are failing at a rapid rate.

"That business is going away," Gorin said.

The near-term outlook is not more favorable. Gorin said SCIF is seeing three times the number of bankruptcies in 2009 as in 2008.

Even so, the fund has value. California is looking to sell a share of SCIF's book of business valued at $1 billion in an attempt to raise revenue for cash-strapped state coffers. Insurance Commissioner Steve Poizner has filed a lawsuit to block any sale.

The A.M. Best Special Report, "Workers' Compensation: How Bad Will It Get?" predicted the cumulative impact of the economic downturn, challenging market conditions, increasing loss cost trends and other factors to continue impacting the line through 2009 and into 2010.

Combined, California and Florida accounted for about 23% of all workers compensation DPW in 2008, according to the report. Together, they saw a nearly 18.0% drop to $9.9 billion in 2008, from $12.1 billion in 2007.

Saif Corp. saw the worst year-to-year drop in DPW, according to the statistical study, down 31.5% in 2008. In addition to the same economic impacts suffered by the bulk of the sector, Saif's result stemmed from a one-time change in the way it recognized premiums and agent commissions, said Chris Davie, vice president of corporate policy and external affairs. The company shifted from accounting for the results at the time of payment to doing so at the time of policy inception, he said.

At the recent workers compensation educational conference in Orlando, Fla., Insurance Information Institute President Robert Hartwig presented a report showing net written premiums fell by 1% in 2007, 1.4% in 2008 and 3.6% in the first quarter of 2009, in what Hartwig said was the first three-year decline since the early 1930s.

"Weakening wage and salary growth is expected to cause a deceleration in workers' comp exposure growth," Hartwig wrote.

In May, NCCI changed its short-term outlook of the workers' compensation market from optimistic to guarded and assessed the long-term outlook as cautionary. NCCI's annual "State of the Line" analysis found a combined ratio of 101 for the 2008 calendar year, unchanged from the final 2007 number.

In Florida, NCCI filed for an average statewide decrease of 6.8% for workers' compensation rates for a seventh consecutive year; if approved, the cuts would lower payments by Florida businesses by more than $166 million (BestWire, Aug. 24, 2009). In June, Insurance Commissioner Kevin McCarty rolled back a 6.4% rate increase for workers compensation insurance rates, reinstating an 18.6% rate cut, after Gov. Charlie Crist signed legislation restoring the 2003 cap on attorney fees in workers' compensation cases.

The A.M. Best report cautioned that medical-related expenses are outpacing the decline in claims frequency and pricing adjustments related to reforms previously adopted in states such as California and Florida. However, the report forecasts that the intent of the reforms will "generally hold" and forestall a move toward losses at the level experienced in the late 1990s.