The U.S. workers compensation insurance market is likely to post a fifth consecutive year of underwriting profits in 2019 after stellar results in 2018, Fitch Ratings is predicting in a new report. It is unclear, however, if a sixth year of good times is in the cards, thanks in part to heightened competition and price cuts.
“The workers compensation segment is known for past periods of volatility, but recent experience represents an unprecedented level of underwriting success,” Gerry Glombicki, director of Insurance at Fitch Ratings, said in prepared remarks. “However, all good things eventually come to an end, and these favorable underwriting profits are not sustainable in the long term in light of competitive forces, recent price deterioration and potential for future claims trend deterioration.”
Fitch said that U.S. workers compensation insurance results will stay profitable in 2019 even as market fundamentals weaken a bit through the year. The market is coming off of a successful 2018, during which the sector produced an industry combined ratio of 86 in 2018 thanks to “extremely strong statutory underwriting profit,” according to the ratings agency.
From 2015 through 2018, workers compensation insurance in the U.S. produced an average combined ratio of 93.
Here’s why there’s some doubt about U.S. workers compensation carriers producing a sixth year of average underwriting profit: competition is increasing and pricing is declining, which makes the market vulnerable to trouble if large claims hit.
Fitch notes that workers compensation is generally cyclical and volatile. And so if regulatory and legal changes hit in key states, market fundamentals can shift dramatically. Fitch points out that claims trend frequency and severity has been relatively favorable for several years, but that can change with a few accidents.
“Claims severity, particularly related to medical costs, bear close monitoring,” the report concludes.
At the same time, the Fitch report points out a few factors that can keep the good times going longer: technological change and highly favorable reserve experience.
According to Fitch, advanced analytics and more powerful information systems can help reduce operating expenses, boost risk selection and pricing, and optimize claims outcome, and workers compensation is incorporating the technology into its operations.
In terms of reserve experience, Fitch noted that workers compensation has performed well recently, in part because of greater reserve redundancies. Fitch said that there has been a relatively conservative reporting in losses for the most recent accident years, so this will likely continue in some form.
Fitch singled out two leading performers in the workers compensation space: Berkshire Hathaway and Chubb, both of which it said had average combined ratios below 90 over the last five years.
Source: Fitch Ratings