Declining Rates a Possible Threat to Comp's Profitability

Thursday, December 26, 2019 | 0

AM Best’s Market Segment Report says insurance rate decreases have led to margin compression in the United States, and competitive pressure could lead to adverse effects on income statements and balance sheets if companies are unable to set aside adequate capital for loss reserves.

Workers’ compensation insurers recorded an 86.1% combined ratio in 2018 versus 92.1% in 2017. However, on a direct basis, loss ratios are deteriorating in 2019.

The rating agency said it is concerned about reserve adequacy and that with rate declines happening consistently since 2015, the viability of claims reserves remains uncertain.

AM Best also analyzed the health of the workers’ compensation line through its Workers’ Compensation Composite, which comprises U.S. carriers and state funds for which workers’ comp net premiums are 50% or more of total net premiums. The carriers accounted for 51.7% of U.S. workers’ comp net premiums this year, compared with 33.8% in 2010.

AM Best also said the carriers reported $4.6 billion in net income in 2018, a 12.2% year-over-year increase. Through the first half of 2019, the carriers in the composite group generated approximately $2.1 billion in net income.

AM Best projects that payroll growth may plateau, dissipating any premium growth.

Despite "extended market softening," AM Best said profitability in the industry remains strong as a result of fewer reported claims, legislative reforms and more efficient use of data and predictive analytics.