Dennis Mealy, NCCI's Chief Actuary, in a "State of the Line" report at NCCI's annual issues symposium on May 5, 2011, characterized the condition of the workers' compensation insurance market as "deteriorating." Most discouraging of all was his announcement that the combined ratio for workers' compensation insurance in 2010 was 115, a five-point rise from 2009. However, the report noted, three points of this increase were produced by one carrier's addition of more than $800 million to excess workers' compensation reserves.
Private workers' compensation carriers posted a pre-tax operating loss of one percent in 2010, the first such loss since 2002 and the worst result since 2001. This negative bottom line occurred despite investment gains for the insurance industry in 2010. Still, investment returns for both the total property/casualty industry and the workers' compensation portion of that industry remain at historically low levels, and 2010's gains are unlikely to be maintained without rises in interest rates.
Workers' compensation net written premium continued to decline, by 1.3 percent in 2010 for private carriers. This represents a much smaller decline compared to the annual decline in the years 2007-2009, perhaps a sign that the economic recovery is having a beneficial effect.
Although the reserve position of private carriers continued to worsen somewhat in 2010, with a deficiency estimated at $10 billion, an increase of $1 billion from year-end 2009, the report noted that, when taking into account allowable discounting of indemnity reserves for lifetime pension cases, the deficiency falls to $5 billion, a relatively modest figure in a total carried reserve base of more than $109 billion.
An increase in small lost-time claims was recorded in 2010, producing two notable results: (1) an increase of average medical cost per lost-time claim of only two percent, the smallest such increase since 1993; and (2) a drop of three percent in the cost of indemnity claims, the first such actual drop since 1993. The report notes, however, that these results are probably aberrations produced by a temporary growth of small lost-time claims, which would have been medical-only claims in more "normal" times, as the economic recovery takes hold and do not reflect any underlying reduction in medical and indemnity cost drivers.
The multi-year trend in declining lost-time claim frequency halted in 2010, replaced by what the report calculates as a three-percent increase. The report attributes much of this increase to the many small lost-time claims, which may have been medical-only claims in more "normal" times, as discussed in the preceding paragraph.
Finally, the report discusses several market challenges in the future. Deteriorating underwriting results are prominent among these. Very simply, with investment yields stuck at their historic lows, present levels of underwriting losses cannot be sustained. In other words, the combined ratio must decline substantially if a reasonable return on capital is to be earned. Secondly, the industry must determine whether 2010's frequency increase betokens a long-term trend or is a transient phenomenon associated with recovery from the recession. Thirdly, the industry will be concerned with political developments on the national level. Enactment of the financial reform bill and establishment of the new Federal Insurance Office presage a growing influence of the federal government over the industry. Moreover, the size of the federal deficits and the potential for significantly higher inflation must be monitored. Finally, the impact of the healthcare reform bill on workers' compensation insurance remains to be seen.
Read the full report: NCCI State of the Line Presentation.
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