Fitch: WC Combined Ratio Worst in 10 Years

Workers’ compensation, the largest commercial-lines segment representing 18 percent of commercial lines net written premiums in 2011, posted a statutory combined ratio of 117 percent 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’ comp line.

“Recent premium rate increases in workers’ comp 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’ comp market to have a combined ratio of 110 percent or better in 2012 or 2013 without significantly more price improvement.

Workers’ comp has generated reserve deficiencies from prior underwriting periods in the last three consecutive years.

Auden said Fitch believes that “workers’ comp reserves at year end 2011 are one of the weaker segments from a reserve adequacy perspective for the P/C industry, and industry results will continue to be affected by unfavorable reserve development going forward.”

From a ratings standpoint, overall underwriting performance is given greater consideration than individual lines’ results, according to Fitch.

However, workers’ comp 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 stated. The report analyzed the workers’ comp market and the factors currently influencing the market.