The workers' compensation environment in California has transformed itself into one of competition and profits, according to a special report put out by the A.M. Best Co. today.
A series of state legislative actions has drastically reduced workers' comp loss costs and frequency trends in the state. "However, it still is premature to view these reforms as final and lasting in light of the uncertainty of the actual long-term savings generated by the reforms, considering this long-tailed business," report author Mark Murray wrote.
Although the reforms have weathered several challenges, a rollback in some areas still is a threat to the health of the line as well as savings realized by California employers, it added.
Despite the changes in the California workers' comp market, which have created a very profitable, appealing and competitive line of business, there still is much uncertainty with regard to the longer-term evolution of the market.
"While expectations are for reduced profits over the midterm, this market has improved considerably and is a highly coveted and profitable line of business for now," the report said. "Only time will tell if this highly cyclical market can sustain profitability."
Mr. Murray noted that the calendar-year loss ratio of 108 percent in 2000 declined to 57 percent for 2005. "While it's too soon to know the reported 2006 loss ratio, early indications are in the mid-to-high 40s range," he wrote.
But there is still uncertainty with regard to the longer-term evolution of the market.
Some of these factors include a precipitous drop in prices that may not be justified by the loss ratio drop along with the possibility of rollback of some reforms.
In addition, because of the long-tail nature of workers' comp claims, the ultimate savings of the reforms may remain an unknown for several years to come.
"Although all of these factors are uncertain at this time, those companies that were quick to respond to the changes brought by reforms are being rewarded through very profitable results," Mr. Murray wrote.
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