Low investment yields, deteriorating underwriting results and a record low interest rate, combined with other unknown factors, will make for a challenging 2010 for workers’ comp providers, according to NCCI Holdings Inc.
The provider of data and statistics to the workers’ comp market released its annual State of the Line market analysis. This year’s report indicates that the workers compensation calendar year combined ratio was 110 in 2009—up 9 points from 101 in 2008. However, 3 points of the increase in the combined ratio was due to a single carrier adding about $1 billion to excess workers’ compensation reserves for Accident Years 2000 and prior. This reserve strengthening was almost 90% of the prior year reserve strengthening for the entire industry. Excluding that, reserve addition would lower the industry’s combined ratio to 107, still a significant deterioration from 2008. The 107 would make the recent pattern of combined ratios since 2006 almost identical to that experienced from 1995 to 1998, which were similar points in the last cycle, NCCI reports.
“The workers’ compensation insurance industry had a trying year in 2009,” NCCI President and CEO Steve Klingel says. “And a series of unknown factors—from the pace of economic recovery to the long-term impact of the new federal health care law, among others—leave the line in a precarious position and facing a host of challenges moving into 2010.”
Deteriorating underwriting results, combined with the record low interest rate environment left the line at only slightly better than breakeven after investment income is considered, NCCI Chief Actuary Dennis Mealy says. “The calendar year net written premium declined precipitously again in 2009, for both private carriers and the state funds, as the recessionary impacts, particularly on manufacturing and contracting, along with price decreases driven by declining frequency and the competitive market took their toll. And industry written premium has declined 23% over the last two years.”
Other market indicators/trends highlighted in NCCI’s 2010 State of the Line report include:
• The 2009 accident year combined ratio is 107, up five points from Accident Year 2008.
• Workers’ compensation insurance prices continued their declines in 2009 in most jurisdictions. Bureau rate and loss cost decreases continued, mostly driven by the large frequency declines and moderating increases in medical and indemnity average claim costs working their way into filings.
• NCCI estimates that the reserve position deteriorated slightly to $9 billion at year-end 2009, up from a $6 billion deficiency last year. After consideration of the allowable discounting of the indemnity reserves of lifetime pension cases, the reserve position is a slight inadequacy of about $4 billion on a total reserve base of more than $106 billion.
• Claim frequency continued to decrease in 2009. For NCCI states, the frequency change was reserve position of the private carriers -4%. The prior year’s change was -3.4%, and the 2007 change was -3%. NCCI’s research indicates that the recession put additional downward pressure on frequency, because the lack of hiring allows the workforce to become more experienced and less prone to injury.
• Medical costs have moderated somewhat over the last few years, even though they continue to increase faster than wages. In fact, in four of the last six years, the average cost increases have been between 5% and 5.5% per year, down substantially from the at-or-near double digit rates of increases we were used to seeing in the late 1990s and early 2000s. States continue to look for ways to control medical costs in their workers’ compensation systems.
• Indemnity claim costs also continue to outpace wage increases, although indemnity costs have moderated since 2002. At the state level, NCCI has seen a push to increase benefits; however, little actual legislation has moved forward—most likely due to the impact of the recession on the business climate.
• Low investment yields are likely to be around for a while longer. As the economy begins to recover, all eyes will be on the Federal Reserve to see what it plans to do with interest rates, as well as with the monetary stimulus it has pumped into the economy over the past two years. Longer-term rates have already edged up a bit. As of this writing, the 10-year Treasury yield is almost 4% and the 30-year yield is almost 4.75%. Last year at this time, 10-year Treasuries were yielding less than 3%.
• The combined ratio of the residual market pool continues its recent pattern of being in the 105% to 115% range. The combined ratio has drifted up a bit in recent years as the pools have continued to shrink, leaving the more challenging risks in the residual market. The current policy year underwriting loss is about $75 million, which—although not at NCCI’s goal of self-funded residual markets—is not an undue burden on the voluntary market at this time.
• Residual market premiums dropped by nearly 30% in 2009, and are now about $500 million. Premiums have dropped by two-thirds since 2004. Overall, the market share of the residual market pools serviced by NCCI for 2009 stayed steady at 6%, due to the drop in premiums in the voluntary market from the recession and loss/cost rate decreases.
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