For over a decade, workers comp insurers have watched profit margins erode, as rates in many states continue their precipitous fall. The mismatch between premiums collected and losses paid out has reached alarming levels, with a projected combined ratio of 121.5 percent for the current year. Even in the best of times for investments, making up 21 percent against losses would be daunting, and these are hardly the best times for money to make money.
The ever-reliable Roberto Ceniceros writes in Business Insurance that the long-awaited upward trend in rates for comp insurance appears to be underway. Among the 38 states directly administered by NCCI, there are requests for modest rate increases in 19; given that the insurance cycle runs from July to June, we can expect to see more states with rate increase requests over the next 9 months. The increases are by no means dramatic (and, some would argue, hardly adequate when measured against insurer losses). The rate increases proposed by NCCI all fall within single digits.
There are a number of reasons for higher insurance losses:
– payrolls are down due to the recession, resulting in lower premiums
– frequency is up – an ominous sign, given that frequency had been declining year after year
– severity continues to increase, as injured workers stay out of work longer and access more exotic treatments
– returning injured employees to their jobs is increasingly difficult in an economy where jobs are disappearing
Insurers Behaving Badly
When contemplating the problems of insurance companies, we must never lose sight of the tendency, as my colleague Tom Lynch puts it, of “insurers eating their young” – in other words, despite the losses, insurance companies persist in offering steep premium discounts, leading state regulators to conclude that they don’t really need rate reductions. Insurers continue to hope that their underwriters have a magic touch in finding the good risks and avoiding the bad. With margins as tight as they are, finding a profitable book of business becomes increasingly unlikely, no matter how skilled the underwriting.
A.M. Best projects the short term prospects for comp carriers to be “grim.” That is no overstatement. State regulators tend to be slow to respond to requests for higher comp rates. Employers are already struggling in a bad economy and regulators will do everything possible to keep comp costs as low as possible. While the long-term trend of lower rates may finally be nearing an end, the upturn is likely to fall short of what is needed. These are tough times for comp carriers, with no significant relief in sight.
Tags: market conditions, rates