Liberty Mutual CEO Edmund "Ted" Kelly described workers compensation coverage as a "time bomb" that will become even more costly and unprofitable when inflation rises.
At a conference in New York, Kelly, whose company has historically sold a significant amount of workers compensation coverage, said that Liberty Mutual is now "willingly reducing our exposure" to the sector out of fear policies sold now will be more expensive than most insurers anticipate when claims are submitted in later years.
"Inflation is the biggest threat to this industry," he said, referring to all property/casualty coverage. "We're worried about 2014 and 2015."
Industrywide, workers compensation coverage is already being sold at a loss, with a combined ratio of 119, Kelly said.
But insurers also earn money from investing the premiums until they need to pay claims to boost profit. Insurers are also beginning to suffer as they invest in fixed-income securities paying very low interest rates.
Kelly said Liberty Mutual, in anticipating inflation in four years or so, has reduced the duration of its bond portfolio by almost one-third so that it can reinvest the funds when the securities come due.
"In good times, you're inclined to miss problems," Kelly said. "We have actually come off a remarkably easy period for the insurance business.... Too many of us thought we were making money because we were smart. In fact, we were making money because inflation was low and it was pure dumb luck."
But Kelly said he was "really optimistic in the future" because the troubles he predicted, if they came to pass, would present opportunities for stronger companies to buy weaker ones or take their business.
"The companies that emerge from this strong will have their pickings," he said.
In a separate presentation at the conference, John Doyle, the president and CEO of American International Group Inc.'s (AIG) U.S. property/casualty operations, said his unit had cut back on how much workers compensation coverage it sells. It now has annual premiums of about $800 million, compared with $3 billion in 2007.
"It comes with some pain," Doyle said. "But you have to be disciplined in this sort of marketplace to make decent returns."