BY STEPHEN J. KLINGEL
Where does the prospect of increasing health care costs, a faltering economy, a challenging investment environment and a rapidly changing political environment leave decision-makers in the workers’ compensation insurance market?
In May, the National Council on Compensation Insurance issued its annual “State of the Line” workers’ comp market analysis, reporting that carriers turned in solid overall results in 2007 and that the short-term view for the market is optimistic.
However, the long-term outlook for workers’ comp remains cautionary, due to a collection of uncertainties that continue to confront the market.
In real terms, this year’s NCCI report indicates that the workers’ comp calendar-year combined ratio stands at 99—the second-consecutive year that the line has realized an underwriting profit, albeit with a six-point deterioration from 2006.
However, NCCI continues to observe that a low interest rate environment, combined with the modest performance of the equity markets, have left the line with post-tax returns on surplus that are far below record levels—and these results barely return the industry’s cost of capital after the significant payments of federal income taxes.
In other 2007 results, calendar-year net written premium declined for private carriers for the first time in eight years. (It was the second straight year of workers’ comp premium declines, inclusive of the state funds.)
We also reported that the 2007 accident-year combined ratio came in at 92. On an accident-year basis, the current underwriting cycle peaked in 2006, with an 84 combined ratio (more than a 55-point improvement since 1999).
As NCCI’s “State of the Line” report (available at www.ncci.com) points out, there is a significant impact on the countrywide numbers caused by the state of California. Excluding California would increase the calendar-year combined ratio by about five points—to more than 104. And excluding California from the accident-year combined ratio would raise it from 92 to about 97.
In terms of pricing, declines in workers’ comp insurance rates accelerated in 2007. Significant reductions continued in California and Florida, since the reforms in those states favorably impacted costs and improved marketplace conditions.
Other key findings in the NCCI analysis included the following:
• Favorable frequency trends continued—and along with payroll increases, were more than enough to offset medical and indemnity claim cost increases.
This resulted in bureau loss cost and rate filings that generally were downward last year, with a couple of notable exceptions.