Uncertain future for US workers’ compensation insurance line, warn AM Best

According to a recent AM Best report, in the last five years, the annual underwriting profit in the US workers’ compensation line of business has averaged $4.8 billion and totaled almost $24 billion during the period.

Uncertain future for US workers’ compensation insurance line, despite the line generating solid profits. This is a level of profitability unmatched by any of the other major property/casualty lines of business.

Direct premium volume also rebounded in 2023 to $52.2 billion, following a sharp drop in 2022. Which, according to the agency, reflects the benefits of workplace safety and legislative changes that have reined in workers’ compensation claims costs as the frequency of claims continues to decline.

Strong favourable loss reserve development for workers’ compensation drove the positive calendar-year results and was the primary reason for the entire property/casualty industry’s favourable reserve development. What appears to be redundant reserves sets the stage for more favourable development in 2023.

In the most recent five-year period the segment’s net loss ratio has ranged from 45.4 to 49, and the combined ratio remained within the range of 86.2 and 92.2, reporting 87.9.

Unemployment in 2023 was reported to have gone down significantly, from 5.4% in 2022 to 3.5% in September 2023. This suggests a continued rise in workers’ compensation premiums through the end of 2023, but that will depend on other economic factors, according to analysts.

Inflation could disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a commensurate increase in employee wages, rate increases may be necessary to cover the gap.

Inflation could also necessitate companies further sharpening their risk management and loss control efforts to limit claims frequency.

Even though net income has been consistently solid, at more than $3 billion each the past six years, it has not been growing.

The rating agency analyses the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite, which is composed of US companies, including state funds, whose workers’ compensation and excess workers’ compensation net premiums constitute 50% or more of their total net premiums.

As of the end of 2022, these specialists accounted for almost 35% of overall industry’s workers’ compensation net premium volume, up from just under 30% in 2021.

Although net income remains strong, it has not been growing, even as policyholders’ surplus has.

This has led to a drop in after-tax return on equity the past two years. Calendar-year 2023 will provide more guidance on the ROE: Will the current, lower return level persist or will the composite’s ROE strengthen and meet or exceed pre-pandemic levels?

by Nataly Kramer