The Workers' Compensation market is continuing to improve as rates increase and exposures grow, but signs point to a continued underwriting deficit through this year, according to a report from Fitch Ratings.
Fitch's “Workers' Compensation Insurance Market Update,” says, after a long period of decline, rates have increased for two consecutive years “with little sign that pricing trends will reverse in the near term.”
The report notes the Council of Insurance Agents & Brokers most recent P&C lines survey says workers' comp rate hikes jumped close to 10 percent in the first quarter of 2013. The report notes that a Marketplace Realities report from insurance broker Willis North America Inc. predicts rates going up 2.5—10 percent, with more than 20 percent increases projected in the underperforming California market.
Added to the improving state of workers' comp, premium volume has grown benefiting from rising rates and increased insured exposure gains due to the “modestly improving economic and employment conditions.” Volume rose by 7 percent in 2012, the largest of all major commercial insurance market segments, says Fitch.
However, workers' comp continues to not show an underwriting profit and “has been the worst-performing major commercial lines segment for some time.” While the aggregate combined ratio improved 7 points to 110 in 2012, Fitch projects the combined ratio should improve further to 105 by the end of 2013. The rating service credits better pricing on the loss ratio and revenue growth “modestly reducing expense ratios.”
The cost of healthcare greatly influences workers' comp costs, Fitch notes, and those cost factors “tend to expand at a higher rate than general inflation.” The costs were “a bit more stable” in 2012, but how sustainable that trend is remains in question with the implementation of the Patient Protection and Affordable Care Act, which will determine future volatility in workers' comp claims.
Overall, Fitch says given worker's comp represents 18 percent of the P&C industry commercial lines net written premium, coupled with market hardening and underwriting improvements promoting earnings stability, Fitch says insurers are viewed “favorably from a credit perspective.”
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