Best’s Market Segment Report: Workers’ Compensation Remains a Profit Engine for U.S. Property/Casualty Insurance Industry

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OLDWICK - JULY 18, 2023 08:30 AM (EDT)
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 a new AM Best report.

The Best’s Market Segment Report, “Workers’ Compensation Remains a Profit Engine for the P/C Industry,” notes that favorable prior year loss reserve development continued to bolster the insurance industry’s carried loss reserve position in 2022, owing to the long-term declines in claims frequency. The workers’ compensation segment has experienced a softer market compared with other commercial lines of coverage, particularly auto and general liability.

The report notes 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; and


• 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 report also notes that workers’ compensation 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 segment is still subject to a number of factors with longer-term implications on operating performance. Workers’ compensation remains susceptible to rising inflationary pressures. Higher wages have driven indemnity costs up, resulting in a modest increase in claims severity.

“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.”

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=333561 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100

countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.