Workers’ Compensation Remains Profit Engine for U.S. P/C Insurers

Workers’ compensation insurers’ underwriting results continued to outpace the rest of the U.S. property/casualty (P/C) commercial sector in 2022, as they benefited from the long-term decline in workplace accidents and a reduction in fraudulent claims, according to an AM Best report.

Favorable prior year loss reserve development continued to bolster the insurance industry’s carried loss reserve position in 2022, as a result of the long-term declines in claims frequency, said the Best’s segment report titled “Workers’ Compensation Remains a Profit Engine for the P/C Industry.”

The workers’ compensation segment has experienced a softer market compared with other commercial lines of coverage, particularly auto and general liability, the report said, noting that pricing has declined since 2015, except for the post-pandemic period, from the second quarter of 2020 through 2021, when modest increases became the norm.

The report highlighted several trends occurring within the segment, including:

• The segment reported a combined ratio of 87.8 in 2022, almost 15 percentage points lower than the overall P/C segment’s 102.4. The segment’s combined ratio for 2022 includes favorable loss development on older accident years totaling $6.5 billion, which reduced the reported combined ratio by approximately 13.5 percentage points.
• The segment, in which premiums are based on payroll levels, has benefited from the largest U.S. wage growth in over 25 years, coupled with strong job growth, which has helped increase its overall premium to pre-pandemic levels.
• Medical and indemnity severity increased, but the magnitude of these increases was less than the increase in wages. The higher payroll exposure base for workers’ compensation insurance kept the increase in claim severity manageable.

Workers’ compensation written premium has benefited from the consistent rise in demand for labor (following a drop in the unemployment rate from the April 2020 peak of 14.7%), as evidenced by 9% year-over-year increases in direct premiums written (DPW) and net premiums written in 2022. In the first quarter of 2023, the segment’s DPW was up by 4.7% over the same period in 2022, a little more than half the 8.5% increase from first quarter 2021.

The segment is still subject to a number of factors with longer-term implications on operating performance.

For example workers’ compensation remains susceptible to rising inflationary pressures and higher wages have driven indemnity costs up, resulting in a modest increase in claims severity, the report said.

“Some market observers expect wages and health care costs to rise faster than inflation within another year or so,” said David Blades, associate director, Industry Research and Analytics, AM Best. “This could weaken reserve adequacy and temper the possibility of further improved underwriting results because of higher-than-expected claims from prior accident years.”

A full copy of this report can be obtained via AM Best.

Topics Carriers USA Profit Loss Workers' Compensation Talent Property Casualty