According to ratings agency AM Best, the workers’ compensation (WC) segment is continuing to outperform every other lines of business in the US property & casualty (P&C) sector, reinforced by ongoing declines in loss frequency and favorable reserve development.
AM Best states that the workers’ compensation line has been more profitable than any other personal or commercial line of business since 2015, which underlies the rating agency’s current stable outlook on this specific segment.
In fact, the agency noted that P&C insurers underwriting workers’ compensation managed to withstand the turbulence of the COVID-19 pandemic effectively, clearly evidenced by the 88.7% combined ratio for 2023.
The 2023 combined ratio is slightly more favorable than the median 10-year combined ratio of 91.5%, which clearly indicates the workers’ compensation line’s consistently profitable results.
Christopher Graham, senior industry research analyst, AM Best, commented: “Effective workplace safety initiatives of the past decade or more have helped control loss frequency, and, along with declines in fraud and in defense costs, have contributed to the line’s excellent underwriting margins. Equally as impressive, the workers’ compensation line’s net operating ratio was 14.5 points better than that of the industry.”
According to AM Best, one of the biggest drivers for WC calendar year profitability has been favorable development on the loss reserves of prior accident years. Data from the agency shows that WC loss and loss adjustment expense (LAE) reserve development for older accident years was favorable by $6.9 billion in 2023.
On top of that, prior accident-year development for the entire P&C industry was favorable by around $2.9 billion, says AM Best, which clearly indicates that the aggregate loss development for P&C lines other than workers’ compensation was adverse by about $4 billion.
In addition, medical severity, which began to slow down in 2009, still remains low. In fact, it remains lower than both general consumer price index (CPI) and medical CPI. AM Best suggests that the lower medical severity will likely play a big part in the consistent favorable development in recent years.
Pricing across the segment has also dropped slightly in each of the past nine quarters, but a combination of other factors have spurred premium growth, mainly wage increases and job growth, bringing net premium above pre-pandemic levels.
Lastly, AM Best notes that the market remains competitive and profitable, and that there is very little difference in total direct premiums written among the top insurers, and that the top 25 insurers account for about 67% of all workers’ compensation business, a low amount compared with other lines.
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