There has been a steady decline in Workers’ Compensation rates since the beginning of 2015, which is attributable to the overall market softening.  However, we are starting to see profit margin compression.  Medical loss cost severity is rising, benefits from prior accident year reserve redundancies are declining, and the growing involvement of attorneys is increasing the average settlement costs.

Workers’ Compensation premiums always have an inverse relationship with the unemployment rate – and since rates have decreased on average since 2015, the level of top line premium is attributed primarily to an increase in the payroll base.  According to the National Council on Compensation Insurance (NCCI), payroll growth had a 4.4% positive impact on direct premium growth for private carriers as U.S. unemployment continued its decline since 2010.  However, the U.S. has not recorded a consistent decline in unemployment rate longer than 9 consecutive years since it began tracking unemployment rates in 1929.

Long declines have historically been followed by sharp spikes in unemployment – which serves as a forewarning to workers’ compensation writers to expect payroll growth, and any resulting premium growth, to cease sooner rather than later. 

We are at the bottom of the market.  There has been so much compression and carriers are getting pinched on their investment incomes.  We are also seeing some potential unraveling of the Affordable Care Act; when individuals have healthcare, they are less likely to file Workers’ Compensation claims so this change could impact loss ratios and profitability.

Unemployment numbers are at an all-time low.  When the market swing happens, we will see new employees entering the workforce again.  Most Workers’ Compensation claims happen in the first year of employment, so new jobs will generate new claims.  Claims drive frequency and frequency leads to severity.  This will further impact the profit margin compression already happening and harden the market.

Risk Innovations is a wholesaler that specializes in monoline Workers’ Compensation.  We have 35+ specialized markets to assist with your unique needs; including multi-state risks, new ventures, high experience mods, tough class codes, etc.  The market is making a big shift and our team of dedicated underwriters is standing by to set you up for success!

-Mike Mendonca, Workers’ Compensation Manager

Source:  AM Best’s Market Segment Report, US Workers’ Compensation, December 2018