Large increases in the 2020 combined ratios of two of the nation's largest state workers' compensation insurance funds stand out during a year that saw private carriers continue to report remarkably resilient underwriting results.
Factors unique to the businesses of California's State Compensation Insurance Fund and New York's State Insurance Fund Workers' Compensation Fund, or NYSIF, led to the deterioration, as both entities observed some of the same net positive underlying claims trends as their privately held peers.
State Fund's statutory basis combined ratio, according to materials posted ahead of a board meeting that begins Feb. 25, rose to 141.3% from 95.5%, prior to the effects of policyholder dividends. The significantly lower 2019 figure included the benefit of $536 million in favorable prior-year reserve development; it would have totaled 140.5% for that calendar year when excluding the extraordinary adjustment. The company's 2020 results also incorporated factors such as a 14.6% decline in earned premiums, a $15 million premium deficiency reserve and the posting of $44 million in COVID-19 safety funds.
NYSIF's workers' comp combined ratio surged by 22.8 percentage points to 133.5% prior to policyholder dividends on an undiscounted management basis, and by 22.2 percentage points on a statutory basis to 99.7%, according to a management presentation during a Feb. 17 board meeting. The first figure focuses on current-year underwriting expenses, while the latter incorporates the impact of prior-year development. Both increases were largely attributable to the denominator effect of sharply lower premium volume.
An Oct. 1, 2019, reduction in loss costs of 10% created significant headwinds that were later strengthened by economic fallout from COVID-19, leading to a 23.1% decline in net premiums earned. Had those premiums declined in 2020 at the same 7.6% rate as in 2019, NYSIF's undiscounted management basis loss and loss adjustment expense, or LAE, ratio would have only increased by 0.1 percentage points year over year instead of 20.7 points, all else being equal. A decline in earned premiums in line with that reported by State Fund would have shaved the increase to 12.2 points.
The rates of change implied by the normalized results for the two state funds are more consistent in their magnitude with S&P Global Market Intelligence's most recently revised projection for U.S. private carriers. The projection calls for a 1.8 percentage point rise in the 2020 workers' comp combined ratio to 87.3%, including an assumption that favorable reserve development for recent accident years helps to mitigate the effects of lower premium volumes. The National Council on Compensation Insurance's most recent private carrier combined ratio estimate for 2020 is a 1 percentage point increase to 86%.
The business line has broadly benefited from lower claims volume relative to history and the concerns that arose following the onset of the pandemic when a number of jurisdictions granted a presumption of compensability to various categories of frontline workers who contracted COVID-19.
Employers Holdings Inc., a pureplay workers' comp provider, reported Feb. 17 that its consolidated combined ratio fell by 0.6 percentage points to 88.5% in 2020 even as its earned premiums slumped by 11.6%. The company posted $81.6 million in favorable prior-year reserve development and reduced its 2020 loss and LAE ratio to reflect consistently favorable trends in the frequency of compensable indemnity claims.
Frequency declined in nearly all of the states in which Employers operates and that was only partially offset by a moderate increase in severity.
"We saw frequency declines in 2020 across the board, whether you measure it in terms of just purely the number of claims that came in the door or as a percentage of payroll or premium," said Executive Vice President and Chief Actuary Katherine Antonello during a Feb. 18 conference call. "They were all down double digits."
Employers' experience was not unique.
NYSIF attributed a lower number of reported claims to some employers pausing activities and others transitioning their employees to work-from-home status.
Hanover Insurance Group Inc.'s workers' comp loss and LAE ratio fell to 49.5% in 2020 from 50.7% in 2019, including $36 million in favorable prior-year development. Its current-year loss and LAE ratio increased by only 0.2%, reflecting the benefits of lower frequency at a time premiums were falling.
"Having been around the workers' comp business for three-and-a-half decades, I continue to be amazed at the loss trends," said President and CEO John Conner Roche during a Feb. 4 conference call.
But Roche remains cautious about and how underlying loss trends will play out when the economy fully recovers. The company is "trying to be very thoughtful about our accident year [loss] picks" as employees return to work, he said.
So, too, is Employers.
"It is very difficult to project future frequency declines or changes in severity in an extremely uncertain environment such as this," Antonello said.
