The workers' compensation state fund market is undergoing a bit of a metamorphosis,industry experts said.
In what has been a generally soft mark environment for the past several years, complete with declining premium volumes both in the initial market and the state fund market, workers' comp rate are now beginning to slightly firm, said Gordon McLean, a senior financial analyst in A.M. Best Co.'s property/casualty ratings division. “As market conditions tighten a bit, private market carriers might be looking at restricting underwriting guidelines,” he added. “That may be why we're seeing some premiums move back to state fund markets.”
McLean was part of a panel for the A.M. Best-sponsored webinar “State of the U.S. Workers Compensation State Funds.”
Workers' compensation funds operate in many states as providers of coverage and often as insurers of last resort for employers who have difficulty in obtaining coverage. In recent years, the overall workers' compensation sector has seen deteriorating underwriting results as payrolls fell and competition heightened.
In 2011, however, state funds saw a 7.1% rise in net premiums written slightly higher than the increase in A.M. Best Co.'s workers' compensation composite. Recently, amid generally soft conditions in the workers' compensation segment, the general market has been more open to writing policies for many of the companies that were previously insured by state funds.
As a result, according to a Best's Special Report, net premiums written by the state funds had declined from 2004 through 2010. Several factors drove increased premiums in 2011, including improved premium audit adjustments, stabilization of employment and payrolls and a stronger pricing environment.
However, as market conditions stabilize and firmer pricing becomes more entrenched, the state funds will see increased demand from employers that no longer can secure affordable coverage elsewhere, said McLean.
New York, Texas and California remain the biggest players in the state fund market, accounting for 53% of all gross premiums written. “That's really a function of the economies of those states,” noted McLean.
In Maryland last year, the market shrunk to about $700 million from nearly $1 billion in 2005-2006, driven largely by the construction trade, said Tom Phelan, president and chief executive officer at Injured Workers' Insurance Fund and current first vice president at the American Association of State Compensation Insurance Funds.“Now we're starting to see some firming of the market and a little growth in payrolls.”
West Virginia has had “a tremendous drop” in premium level since 2005, noted Greg Burton, president and CEO of BrickStreet Mutual Insurance Co.
“That's mainly been driven from competition coming into the market and rates having gone down about 55% in that time period.” He said the state also continues to see soft pricing, and ”we are now writing in other states. Those markets are beginning to harden a bit but not enough to make that big of a difference for us.“
In its report, A.M. Best reported a composite combined ratio of 134, McLean said. ”That's a cumulative effect of the deteriorating rate structure.
“Workers' comp is a long-tail line,” he added. “You've got investable float for a period of time. But on the other hand, combined ratios of that nature are not sustainable for a period of time. What has supported that is the situation where companies had strong balance sheets and there were no catalytic events to turn the market. While companies are able to sustain themselves in the market for some time, it's not something they can do forever.”
Montana noticed a different story when it came to its combined ratio. “Our combined ratios averaged 109 through the Great Recession,” noted Laurence A. Hubbard, president and chief executive officer at Montana State Fund and current president of the AASCIF. “That's important to understand when talking about the terms, level of competition and discussion of market shift. While we're seeing some firming, we're also seeing carriers, similar to in the late 1990s, realizing they can't make the same mistakes again and state funds are not chasing soft pricing to the detriment of their bottom line.”
Companies in the market saw rate increases over the past four quarters, said McLean. “However, when you consider where we were relative to where we are now, it's hard to get too excited about a couple of recent quarters of upward price increases when there were a number of years of downturns. In the last four quarters, we've seen some filings for rate increases and companies eliminating scheduled credits.”
In its report, A.M. Best said the state fund group's total underwriting loss increased to $2.1 billion last year from $1.9 billion in 2010. Incurred loss and loss-adjustment expenses grew at a faster clip than net premiums earned in 2011. That resulted in a higher loss & LAE ratio for the year. Higher unallocated loss-adjustment expenses were the main driver of the increase, but a modestly lower level of adverse development of prior accident years' loss reserves also contributed to the higher incurred losses. Also in 2011, underwriting expenses increased but at a slower pace than NPW, resulting in a lower expense ratio.
A core mission of most state funds is to serve as the guaranteed market for employers in their states. That means state funds are often obligated to offer coverage to companies that experience difficulty in obtaining insurance in the general market.