For years, the profitability of workers compensation insurance seemed to defy industry logic, but market and regulatory corrections are poised to bring results back in line with reason.
Loss expenses in the sector have declined since 2014, including a 9-percentage-point year-over-year drop to 44.9% in the 12 months to Sept. 30, according to an S&P Global Market Intelligence analysis.
The climb in profits has attracted competitors and the attention of state regulators, who are pulling back on the premium prices workers' comp insurers can charge. Loss cost inflation is expected to tick up in the coming year, Keefe Bruyette and Woods analyst Meyer Shields said in an interview. And although the business line is not headed for doom, results will probably be "a little less fantastic," Shields said.
"On an absolute basis, next year will be more than acceptable; on a year-over-year basis, it won't be as good as this year," Shields said.
All except three of the top 20 workers comp insurers saw their loss ratios decline for the 12 months to September compared to the 2017 period, and the metric fell below 30% for Chubb Ltd. and Liberty Mutual Holding Co. Inc. (The figure for Chubb is affected by an accounting change at the beginning of the year.)
As the country emerged from recession, carriers hiked premiums to account for what many thought would be the new reality. However, claims costs did not follow suit, even as the economy expanded payrolls, Shields said.
Companies applied technology to improve workplace safety, and medical cost inflation was low, the analyst said. Limited wage growth also suppressed claims, since workers who make more money are more motivated to get back to work after an accident, Shields said.
Improvements in medical care and the adoption of return-to-work programs also saved insurers in lost-time claims, according to a November report by Willis Towers Watson PLC.
By the fourth quarter of 2017, companies were releasing large amounts of reserves, Shields said. Loss ratios trended downward and profits swelled.
"When you look at it on a trailing 12-month basis, things have gotten to be phenomenal," Shields said.
Yet with more competitors writing, the pricing market has grown soft and rates have begun to come down, and the sector's loss ratio will probably begin to stabilize or turn upward as loss trends return to normal, Shields wrote in a Dec. 12 research report.
The Willis report anticipates continued soft pricing, "amid an insurance marketplace with excess capacity, a rising exposure base and three years of underwriting profitability."
The Hartford Financial Services Group Inc. reported to analysts an uptick in losses during the third quarter, though its loss ratio fell on a year-over-year basis to 47.7% for the trailing 12 months. The higher claims costs came mainly from accidents happening within the first two days of hire and were concentrated in small- and middle-market accounts, said Wells Fargo analyst Elyse Greenspan and Amit Kumar, an analyst with Buckingham Research.
The Hartford, the second-largest writer of workers compensation premiums during the third quarter, believes that the experience will not become a trend and can be remedied with better training and prevention as is more typical for larger companies, the analysts wrote in separate Nov. 15 research reports.
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