Interest rates, residual markets

National Workers’ Comp Combined Ratio Best Since 1997

The nationwide workers’ compensation calendar year combined ratio for 2004 dropped four points to 105 percent, the best performance for the first time since 1997, according to NCCI Holdings Inc.’s preliminary analysis.

The accident year combined ratio last year continued the downward progression that began in 2000 and stands at 94 percent, which NCCI said is the best performance in more than a decade. This reflects a 45-point improvement in just five years.

NCCI, which prepares rate filings for more than 900 insurance companies in 37 states, also said its estimate of the private carrier loss reserve deficiency declined by more than $3 billion to about $12 billion. After allowing for the discounting of lifetime pension cases, the deficiency is $7 billion. The estimated deficiency has been more than halved since year-end 2001, when NCCI’s estimate peaked.

Claim frequency also continued in the current cycle of decline that began in the early 1990s. In addition, comprehensive reforms that were enacted in California appear to be having a positive impact.

However, the organization said that many other troubling issues remain, leading NCCI to propose an outlook of cautious optimism to the line.

Record low interest rates and mediocre stock market performance continue to put downward pressure on the combined ratio needed to make an adequate rate or return.

The low interest rate environment continues to take its toll on the embedded yields in the industry’s investment portfolio. The investment income allocated to workers’ compensation continues to drift lower and is at its lowest level in at least 15 years. NCCI’s internal rate of return models indicate the need for an underwriting profit for the industry to return its cost of capital to investors, even in this long-tailed line. The needed pretax operating gain, in today’s low interest rate environment, remains in the 7 percent to 9 percent range.

Residual market volumes in many states remain at unacceptably high levels, according to NCCI. The organization estimates that the residual market is about 13 percent of the total market in some states, although there have been signs of depopulation, particularly in the larger policy sizes, in the last several months.

In the states where NCCI files, medical costs make up 57 percent of total losses. Medical costs continued to increase at double-digit rates in 2004, rising 10.5 percent over 2003 levels.

TRIA uncertainty

The 2002 Terrorism Risk Insurance Act’s extension continues to be a major uncertainty. All workers’ compensation policies effective since January 2005 have some exposure extending after TRIA’s scheduled expiration date on December 31, 2005.

Other results and market data reported by NCCI in its annual State of the Line report include:

Premium volume continues to increase: Net written premium increased for the fifth consecutive year for workers’ compensation. Including the state funds, premiums were up about 9.5 percent, to $46 billion in 2004. Private carriers increased their net written premium almost 11 percent for 2004. This is a leveling of the trend in the last several years, when the state funds grew much more rapidly than the private carriers. The impact of the California market and the California State Fund accounts for most, if not all, of the shift.

Frequency continues to decline: Preliminary analysis indicates that the frequency of lost-time claims continued its decline in 2004, dropping another 3.4 percent. Lost-time claim frequency has been declining quite consistently since the beginning of the 1990s and has dropped a cumulative 42 percent from 1990 to 2003.