Workers’ Compensation Profit Picture Looks Good in Short Term: Fitch

With favorable results driven by recent reductions in claims frequency and further recognition of material reserve redundancies, workers’ compensation underwriting performance is expected to remain strong in 2021, according to Fitch Ratings.

However, this level of profitability is unsustainable longer term, as claims trends are expected to normalize while competitive forces create renewed pricing pressure, Fitch analysts add. The workers’ compensation industry posted a third consecutive year of 90 or below combined ratios in 2020. This came with a 10% reduction in annual written premiums amid the pandemic, which also led to a sharp decline in claims frequency versus the prior year.

Fitch said pandemic-related losses, particularly for essential services and health care providers to date, are manageable for insurers but remain a source of uncertainty. The segment’s combined ratio is anticipated to remain in the low 90 range for 2021.

Reserve Strength

Workers’ compensation continues to demonstrate the strongest reserve position of any property/casualty industry product line, with calendar year favorable developments averaging 15% of segment earned premiums for the last four years. The segment’s reserve strength was likely maintained in accident year 2020, as reported loss ratios may have underestimated the benefits of declining frequency on incurred losses.

Pricing for the segment contrasts with other commercial property and liability lines that have reported rising prices for the last two years or more. After years of declining premium rates in response to favorable results, uncertainty tied to the coronavirus promoted a stabilization in pricing in 2020. However, Fitch expects rates to again start falling by year-end 2021 as normal economic activity and market competitive forces return. Claims frequency patterns are anticipated to normalize with the return to workplace norms and economic activity, according to Fitch. Loss severity has been stable in recent years but remains a greater source of future volatility with rising general inflation and the potential for higher future medical costs.