Workers’ Compensation Reserve Redundancy Reaches $14 Billion, Reports NCCI

Workers’ compensation insurers continue to stow away more money than necessary in reserves, even as reported loss ratios continue to climb, according to a report released by the National Council on Compensation Insurance.

A.M. Best also released a report concluding that workers’ compensation had weathered the economic slowdown caused by the pandemic well, outperforming other insurance lines.

NCCI said for accident year 2020, workers’ compensation reserves were $14 billion more than what its analysts estimate will be necessary to pay claims. It was the third accident year in a row where carriers had a reserve redundancy.

A chart included in the report shows that carriers have steadily eliminated deficient reserves that peaked at about $10 billion in 2012.

“This chart highlights the cyclical nature of historical industry results and alternating periods of increasing and decreasing levels of overall reserve adequacy,” the report says.

NCCI said the $14 billion redundancy was 12% of the total reported reserves, with $4 billion of that accumulating in 2020 and the rest building up from accident years 2011 through 2019.

Insurers have been reporting increasing loss ratios since 2017, but the report suggests that carriers may be overly conservative. NCCI says that its analysis found that since accident year 2015, loss and loss-adjustment expense ratios were lower than the amounts reported by insurers.

The reported loss ratio for accident year 2020 was 73%, but NCCI calculated the loss ratio was actually 61%. There were similar discrepancies — although smaller — in 2015, 2016, 2017, 2018 and 2019.

NCCI noted that insurer’s reported loss ratios for the same periods tended to decrease over time. For example, carriers reported a 72% loss ratio for accident year 2015 at the end of that year, when claims filed during the year were relatively fresh. But when carriers last year reported revised loss ratios for 2015, the loss ratio dropped to 62%.

“Going forward, NCCI expects the carrier-reported loss and LAE ratios for the more recent (i.e., less mature) AYs to decrease and move closer to NCCI’s (estimates),” the report says.

Future Uncertainty

NCCI said conservatism that comes from the long-tailed nature of workers’ comp claims, which are typically paid out over many years, may be among the reasons that NCCI’s estimated loss ratios are so much more optimistic than the ratios reported by insurers. Uncertainty about future medical inflation and the impacts of the COVID-19 pandemic may also have an impact.

The underwriting cycle and carrier differences in reserve-setting practices are also potential factors, the report says.

Declining loss ratios from 2011 to 2016 were heavily influenced by declining claims frequency. That favorable trend continued through 2020, but reported loss ratios increased year-over-year.

“Changes during this period may reflect increasing competition for WC where charged premiums declined more rapidly than the corresponding decline in carriers’ losses and LAE,” NCCI said.

A.M. Best said the combined ratio for workers’ comp — which includes insurer overhead in addition to losses and loss-adjustment expenses — ticked up to 91.1% in 2020, from 88.5% in 2019.

Direct premiums written dropped 9% to $44.3 billion because of layoffs associated with public safety orders in response to the pandemic.

A.M. Best said the economic impact of COVID-19 is uncertain, but there’s reason for optimism.

“The WC line’s combined ratio in 2020 was a few points higher than in 2019 but still comfortably under the breakeven mark of 100.0 and reflected profitable underwriting. Given the decline in premium, expense ratios rose, but the increase was nominal and did not constrain underwriting earnings much,” the ratings house said.