Innovation helps workers' comp outlook, but 2019 market may be volatile
Wearables, in particular, are helping the workers' comp segment by boosting employee safety.
The workers’ compensation segment of the property & casualty insurance business is a prime target for technology investment to maintain competitiveness and bolster performance, according to a Fitch Ratings report.
Wearables, in particular, are helping the workers’ comp segment by boosting employee safety through sensors and identifying hot spots in the workplace that could lead to accidents like slips and falls. But other technologies such as artificial intelligence, machine learning and drones allow for more data to be processed, create models with more sophisticated algorithms and monitor a worker’s health, says James Auden, managing director at Fitch.
“From a long-term performance perspective, we think falling behind on technology more and more means that you’re less competitive from an expense standpoint. You’re less efficient and effective in settling claims, so that leads to higher loss ratios,” says Auden. “And just in your underwriting, as your peers and competitors are better at segmenting and pricing risk, companies that are less proficient, they risk losing the best parts of their book to other underwriters.”
Related: New technologies boost job site safety, reduce risk in construction
Trouble on the horizon
The report also notes that although most workers’ compensation underwriters are operating from a position of strength as 2018 represents a rare fourth consecutive year of market underwriting profits, the business has also experienced historical instances of very large losses fueled by inadequate pricing and claims volatility.
“If you go back as recently as 2011, I think the industry combined ratio was like 117,” says Auden. “The last four years counting 2018, the market overall is at an underwriting profit. I think really the foundation is tied to those weaker results in 2011, 2010. You have big losses, companies respond by raising rates. You also have benefits in various states from legislative reforms.”
After the Great Recession, “since about 2010, frequency has been favorable,” says Auden. “That’s a recurring pattern in the line. But then loss costs have overall been pretty stable, too.”
Despite the profitable performances in 2017 and 2018, Auden thinks things will get worse in 2019 because there is a long-term trend of pricing declining at the moment, causing rates to decline in turn.