Unfavorable pricing trends, competitive market could weigh on workers' comp sector

Heightened focus on risk management and workplace safety have led to long-term improvements in claims frequency for workers’ comp, but unfavorable pricing trends, a competitive market and other pressures have the potential to reverse this trend, according to Fitch Ratings, Inc., which reported this could result in underwriting results fall back to a break-even point.

Despite P&C insurers facing brutal headwinds from inflation, economic disruption and pandemic-driven loss-cost uncertainty, the workers’ comp sector remained resilient and was the strongest performing large-product line, Fitch Ratings reported. From 2017-2021, the combined ratio for workers’ comp was 90%, and Fitch Ratings said 2022 should only see a modest change and is projecting a combined ratio of 92% for full-year 2022.

Through the first nine months of 2022, the segment’s direct loss ratio stood at 47%. That period also saw direct premiums increase 8.3%. Fitch Ratings noted this growth was preceded by several years of flat to declining premium volume. The gains in direct premiums had several drivers, including wage growth and payroll expansion.

Additionally, Fitch Ratings noted that workers’ comp rates have been flat or down for several years, which makes self-insuring less attractive and could have led to slower policy count attrition.

However, the rating agency warned this premium growth is likely unsustainable.

For each of the first three quarters of 2022, workers’ comp renewal rates fell 1%, indicating strong competition in the market. Fitch Ratings reported this is likely to continue in 2023 and will drive prices lower.

Of more immediate concern, according to Fitch, is growing pressure from medical inflation, which had been relatively tame during 2022. For the past 12 months (ending Nov. 30, 2022), the medical consumer price index (CPI) was up 4.2%. During the same period the previous year, the medical cost CPI was up 1.7%. The rating agency noted this could put downward pressure on margins in the future.

Further, the potential for an increase in large losses via litigated claims persists as huge settlements and defense costs continue to impact the P&C market.

Related:

• Mental stress, crushing injuries among restaurant workers skyrocketed
• The mental side of an injured worker’s recovery
• 3 keys to creating a safe small business