Workers' compensation is the largest segment of all U.S. commercial lines, representing 18 percent of property/casualty industry commercial lines net written premiums in 2012, and has also been the worst-performing major commercial lines segment for some time, according to a new Fitch Ratings report.

However, underwriting results for the U.S. workers' compensation market are set to improve over the remainder of 2013, reversing several years of poor performance; also, the 2012 industry aggregate segment combined ratio improved to 110 percent from 117 percent in the prior year. In its report, “Workers' Compensation Insurance Market Update,” Fitch projects a 105-percent workers' compensation calendar year combined ratio in 2013.

Following a long period of declining premium rates, workers' compensation pricing has increased for two consecutive years, with little sign that pricing trends will reverse in the near-term. Fitch affirms its projection by pointing to the Council of Insurance Agents & Brokers most recent commercial lines market survey that indicates workers' compensation rate hikes are accelerating with a nearly 10-percent increase in first-quarter 2013.

Workers' compensation claims costs are influenced greatly by medical cost factors that tend to expand at a higher rate than general inflations, Fitch said. Health care costs in 2012 were a bit more stable than historical patterns, but sustainability of this trend is questionable given pending implementation of healthcare reform in the United States. The rating agency credits a return to economic stability for a return to declining claims frequency trends.

Loss reserves in the workers' compensation segment have developed adversely for the last four consecutive years. Fitch's analysis suggests that the industry's loss reserve position in workers' compensation remain inadequate.

Given the prominence of workers' compensation as a percentage of many insurers' book of business, continued market hardening and underwriting improvements promote earnings stability that is viewed favorably from a credit perspective. Reductions in workers' compensation loss reserve deficiencies and uncertainty would also contribute towards stability of insurer ratings at current levels.

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