Although workers’ compensation is the strongest performing major commercial product line for the U.S. property and casualty (P&C) industry, the subsector combined ratio is anticipated to rise above 90 in 2024, according to Fitch Ratings’ recently published report, “U.S. Workers’ Compensation Reserve Adequacy and Underwriting Performance: Potential Repercussions of Declining Reserve Redundancy.”
After nine consecutive years of record lows due to “a long-term trend of declining claims frequency and stable loss severity trends,” the high combined ratio in 2024 is anticipated to be caused by “flat or declining premium volume, potential for rising claims costs from medical inflation, and a reduction in favorable reserve development.” Weaker pricing will shift the segment’s combined ratios toward the mid-90s or higher in the next two years.
“Workers’ compensation reserve strength is a key contributor to the P&C industry’s long record of reserve adequacy,” states the report. “In recent years, favorable calendar-year development in workers’ compensation more than offset recognition of material reserve deficiencies in several liability product subsectors due to prior pricing inadequacy and higher loss severity from general and social inflation.”
Diminishing Reserve Strength
According to the report, “P&C industry workers’ compensation loss reserves are still estimated as between 8% and 12% ($11 billion to $17 billion) redundant at year-end 2023. However, several factors point to a decline in overall redundancy, including less favorable development in ultimate incurred losses for the most recent accident years 2020 to 2022 than prior highly redundant years,” the report states.
Although the report notes that workers’ compensation industry is likely to maintain reserves, “more abrupt changes in market competitive conditions or loss severity trends could materially affect reserve experience and move the subsector closer to break-even or worse underwriting performance, with a corresponding effect on overall industry profitability.”
Deteriorating Pricing
“The extended period of strong underwriting profits will inevitably end as the workers’ compensation market remains highly competitive and cyclical,” states the report. “The subsector’s profit resiliency is a bit surprising given less favorable pricing trends in the last three years.” The report cites The Council of Insurance Agents & Brokers Commercial Lines Insurance Survey, which has tracked “modestly declining” prices for workers’ compensation coverage for 32 of the last 38 quarters—including the last 10, capped by a 2.2% decline in 2024. “Workers’ compensation pricing trends contrast sharply with highly positive pricing across the broader commercial lines market for the last five years,” the report states.
Commenting on the report, CLM member Rusty Goudelock, attorney, McAngus, Goudelock & Courie Law, says, “The anticipated rise in the workers’ compensation subsector’s combined ratio will remain relatively consistent with the subsector’s median 10-year combined ratio and, barring some unprecedented shift in subsector losses, allow this line of business to remain a profit-leading commercial insurance product for the U.S. P&C market. At the same time, this adverse trending cannot be overlooked.
“The workers’ compensation insurance industry must remain vigilant and resourceful in countering some present upward claims cost drivers, such as rising accident rates influenced at least in part by staffing shortages prompting more robust job demands being placed on less experienced workers, wage inflation propelled by such an extremely competitive hiring market to fill these challenging hiring needs, an aging workforce that continues to fill more risky jobs, and skyrocketing medical costs inflation.”