Workers’ Compensation Insurers Break Even in 2008
The workers’ compensation insurance industry experienced a year of mostly solid results in 2008, according to Dennis Mealy, NCCI Holdings Inc. chief actuary. In its annual “State of the Line” report, the NCCI (National Council on Compensation Insurance), pegged the workers’ compensation calendar year combined ratio at 101 in 2008, unchanged from the final 2007 number. The 2008 accident year combined ratio was 100 percent, up four points from a revised 2007 projection.
Calendar year and accident year underwriting results continued near breakeven, “which in this investment climate is a necessity if the industry hopes to earn a reasonable return on its capital,” Mealy said.
NCCI President and CEO Steve Klingel said the market is actively competitive and the residual market is shrinking. However, the low interest rate environment that has persisted for several years, combined with the dismal short-term performance of the equity markets, continues to leave the line with post-tax returns that barely meet the industry’s cost of capital.
Outlook
Among the challenges NCCI expects the workers’ compensation insurance industry to face are medical and indemnity costs that outpace wages; low investment yields; and a more pro-regulation political environment including possible health care reform out of Washington.
The recession in particular is having an effect on the workers’ compensation. “The macro economy clearly influences, and, to a large extent, drives the key financial components of workers’ compensation: exposure, frequency and severity, and investment income,” said Harry Shuford, NCCI Holdings chief economist, in the report, “What Does Recession Mean for Workers’ Compensation?”
A weak outlook for employment portends declines in exposures, especially in the more cyclically sensitive (and hazardous) manufacturing and construction sectors, NCCI noted.
“Claim frequency is also likely to come under downward pressure, both from the loss of more hazardous jobs and because, in recessions, companies tend to lay off their least experienced workers first, which has the effect of increasing the skill-level of the remaining workforce,” the group said.
Shuford noted the frequency of claims has been falling since the early 1990s, and there is no evidence to suggest that the trend will end anytime soon.
As wage gains slow in 2009, reflecting both weak labor demand and rising unemployment rates, there will likely be some slowing the growth rate of indemnity severity, NCCI said.
While indemnity loss costs will ease or even drop modestly, anticipated increases in medical prices and utilization will more than offset the easing of frequency. “So, medical loss costs will continue their steady up-trend, even as the economy weakens,” NCCI said.
While the recession may help to reduce claims, it will likely make insurers’ investment income fall, restraining operating gains and return on equity, the group predicted. “This lower interest rate environment will negatively impact new-money returns,” NCCI said.