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Moore: Combined Ratio Means Market Extremely Healthy

By James Moore

Tuesday, September 17, 2019 | 0

Workers' comp combined ratio remained a hot topic from last year. Last week, at the NCCI Virginia State Advisory Conference, the workers' comp combined ratio stunned the audience, and even the NCCI presenters.  

James Moore

James Moore

Last year, the level was at 89%. Many pundits and actuaries thought the combined ratio was bottoming out to the lowest point or bottom of the trough. I received quite a few questions on how the workers' comp combined ratio equals a healthy market. 

One must remember the workers' comp combined ratio level pegs a national statistic.  Each state may have a different level.  

How is the statistic computed? 

The combined ratio computes as losses and expenses divided by premiums.   

What does that mean for insurance carriers? 

For each dollar of premiums written, the insurance carriers generated a 17% quasi-profit. The formula oversimplifies the current market condition. The overall market, though, has been healthy since 2017.   

Is NCCI confident in the figure? 

Yes, National Council on Compensation Insurance actuary Jay Rosen felt the figure, while unexplainable to a point, was very accurate. NCCI uses the numbers given by its members.

Why did the market turn so positive so quickly?

The NCCI presenters at the Virginia forum seemed to not be 100% sure of why the market became so healthy. Take a look at the formula. The losses had to reduce, or the premiums had to increase, for the ratio to shrink.   

Check here for the Virginia state advisory PDF files. 

Overall, there was no one statistic or number that was the “a-ha” moment. Wages rose a little. Indemnity severity and number decreased a smidgen. No one variable made the combined ratio drop. All the variables mixed together made the underwriting gains increase significantly.  

Would a recession return the number to above 100? 

A recession would move the numbers back closer to 100%. One has to remember that the NCCI figures run approximately 18 months behind due to the time needed for data collection and calculation. The market will remain healthy through 2021 regardless of a recession.   

Please remember that a slowdown and a recession are two very different animals.   

Why don’t the carriers refund some of that profit to policyholders?

I recommend not getting down into the minutia of where the 17% profit ends up with the carriers. As a policyholder, check your newest or upcoming quote at renewal.   

The industry workers should be happy with that number. As long as the market is healthy, the agents, adjusters, actuaries, underwriters and other workers' comp personnel should know that a healthy market means more room for advancement and job security.   

Look at the combined ratio as a bellwether. 

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.


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