Workers' compensation, the largest commercial lines segment representing approximately 18% of commercial lines net written premiums in 2011, posted a statutory combined ratio of 117% in 2011, according to a new report by Fitch Ratings. This result is 9.5 percentage points worse than the commercial lines aggregate for 2011 and the worst result in the past 10 years for the workers' compensation line.
'Recent premium rate increases in workers' compensation are an encouraging sign that the market has reached a cyclical bottom,' said Jim Auden, Managing Director at Fitch. 'However, claims costs will continue to be affected by rising medical severity and premium rates will need to improve significantly further for the market to reach an underwriting breakeven.' Fitch estimates that it will be difficult for the workers' compensation market to have a combined ratio of 110% or better in 2012 or 2013 without significantly more price improvement.
Workers compensation has generated reserve deficiencies from prior underwriting periods in the last three consecutive years. 'Fitch believes that workers compensation reserves at year end 2011 are one of the weaker segments from a reserve adequacy perspective for the property/casualty industry, and industry results will continue to be affected by unfavorable reserve development going forward,' said Auden.
From a ratings standpoint, overall underwriting performance is given greater consideration than individual lines' results. However, workers compensation is a source of significant underwriting volatility for commercial lines insurers, and signs of a cyclical turn from recent weak performance levels will promote stability in ratings in the near term.
Fitch's report analyzes the workers' compensation market and the factors currently influencing the market. In addition, it reviews the results of the top 15 workers' compensation underwriters and the shifting market composition over the last five yea