With workers' compensation loss trends seeming to vary widely by insurer during the second quarter, it appears premature to declare an inflection point for a business line that has been characterized by both strong underwriting results and downward premium pressure for the last several years.
The Hartford Financial Services Group Inc. reported that the frequency of workers' compensation losses in certain of its market segments had been trending slightly higher of late. CNA Financial Corp. observed a high single-digit negative trend, while Employers Holdings Inc. officials said their company's rate of loss frequency as a percentage of insured payrolls had been decreasing, and they see no reason for a near-term change in that trend.
The U.S. property and casualty industry generated a combined ratio of 89.3% in the workers' comp line in 2017 when excluding state funds and residual markets, down from 93.9% in 2016, or 90.1% when excluding the reserve charge-inflated losses reported by the U.S. P&C units of American International Group Inc. Yet even when it seemed that results could not get much more favorable from those levels, the industry's first-quarter direct incurred loss ratio in workers' comp dropped by 5.5 percentage points on a year-over-year basis, when excluding state funds and residual markets, to 48.7%. It marked the second consecutive sub-50% quarterly direct incurred loss ratio for the industry, which had previously posted results in excess of 52.6% in each quarter going back to at least the start of 2001.
Even if results were to deteriorate from current levels, it would not necessarily represent a reason for significant concern. But given the cyclicality traditionally associated with the workers' comp business and increasing pressure on rates, it comes as little surprise that analysts are keeping close watch on developments.
The National Council on Compensation Insurance reported approved changes in bureau premium level, which includes advisory rates, loss costs, assigned risk rates, and rating values, of a negative 9.6% in calendar year 2018 through May 10 in states where it submits those kinds of filings. The change in the previous calendar year was a negative 5.4%. Not included in those figures is California, the nation's largest workers' comp market, where the state regulator approved an advisory pure premium rate, effective July 1, that was 10.3% below the average of the Workers' Compensation Insurance Rating Bureau of California's Jan. 1 advisory rate and 21.6% lower than the industry average filed pure premium rate.
Larger employer payrolls in a strong U.S. economy have had the effect of balancing out lower rates and loss costs from a written premium perspective. Employers Holdings COO Stephen Festa said during a recent conference call that his company has observed the effects of the robust economic environment in both the number of individuals employed and the number of hours they are working.
At the same time, The Hartford cited slightly higher loss frequency and the potential for rate pressure to extend into 2019 in cautioning about the prospects for some margin compression in its small commercial and middle-market workers' comp business.
President Douglas Elliot described the slight increase in frequency as a "broad-based economic-driven trend" across the country.
"Keep in mind that absolute frequency is still at historically low levels and margins remain attractive," he said, adding that high rates of participation in the labor market typically lead to less experienced workers on the job and, in turn, more claims.
Workers' comp margin compression was not unique to The Hartford's small commercial and middle-market business in the second quarter. State Insurance Fund Workers' Compensation Fund, a self-supporting, New York-based carrier that competes with private insurers but also functions in a take-all-comers capacity, reported increases in its statutory loss ratios for the second quarter and first half of 2018 of 12.6 and 9.7 percentage points, respectively, to 68% and 63.3% as incurred losses increased and net premiums earned declined. Indemnity loss payments increased by 13.4% on a year-to-date basis through the second quarter to approximately $509 million, according to figures disclosed in conjunction with a recent board meeting.
The fund generated combined ratios of less than 90% in both 2016 and 2017, even including the significant impact of policyholder dividends. Its result last exceeded 100% in 2015.
The industry as a whole is even further removed from an underwriting loss in the workers' comp line as it has generated four consecutive years of sub-100% combined ratios. The early read on results through the first half of 2018 suggests the winning streak will extend to at least a fifth year.