NCCI Offers Precarious Outlook For WC Insurance Market

Boca Raton, FL - NCCI Holdings, Inc. today released its annual State of the Line workers compensation 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. 

"The workers compensation insurance industry had a trying year in 2009," NCCI President and CEO Steve Klingel said. "And a series of unknown factors—from the pace of economic recovery to the long-term impact of the new federal healthcare law, among others—leave the line in a precarious position and facing a host of challenges moving into 2010."

"After the prior three years of an underwriting profit followed by two years of minor underwriting losses, the combined ratio for workers compensation shot up 9 points in 2009, the largest single year increase since the mid 1980s," added NCCI Chief Actuary Dennis Mealy. "The line was one of only two (in addition to ‘other liability') that had an increase in combined ratio for 2009 over 2008."

"These 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," Mealy continued. "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."

As reported above, the workers compensation calendar year combined ratio was 110 in 2009. 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 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.

Other market indicators/trends highlighted in NCCI's 2010 State of the Line report include the following:

• The 2009 accident year combined ratio is 107, up 5 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 of the private carriers 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 
–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, we have seen some 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, and with all the monetary stimulus it has pumped into the economy over the last 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%–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 our 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. 

Other market challenges that NCCI is currently monitoring include:

• The uncertain impact of national healthcare reform on workers compensation—from new taxes, to changes in Medicare reimbursements, to the strain on the system from the newly insured. In terms of workers compensation, the most immediate effect of the bill is in the area of Federal Black Lung Benefits. The Senate inserted a section into the bill that modifies eligibility criterion for Federal Black Lung benefits for minors and survivors retroactively to claims filed after January 1, 2005. These changes will likely increase disease loadings for coal mine exposure, and increase reserves for occupational disease in the various pools that have significant exposure to black lung disease. 

The current combined ratio, together with low investment yields, that is not close to providing an adequate return on the industry's capital. Even with some modest increase in investment yields, the combined ratio will need to be reduced substantially to earn a reasonable return on capital. 

• Any increase in the number of legislative proposals resulting from the changed political climate since the 2008 elections that may put upward pressure on indemnity costs. 

• The political situation in Washington, with the potential to change the nation's financial regulatory system, which makes for a continued period of uncertainty for workers compensation insurers. 

• The underwriting cycle that could be nearing an inflection point, but the early signs are still faint.

Share This Article: