Best's Review


Workers' Compensation
An Oasis in the Desert

The workers’ comp industry remains healthy thanks to a robust job market and sharp underwriting. But headwinds loom on the horizon.
  • Jeff Roberts
  • November 2019
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Key Points

  • Sharp Underwriting: The combined ratio for private carriers during the 2018 calendar year was 83, the lowest since the 1930s.
  • Lower Frequency: The average lost-time frequency declined by 1% in 2018.
  • Quality Assets: The U.S. unemployment rate is just 3.5%, a boon for the workers’ comp space.


The first question they ask is almost always the same.

“How much comp do you have?” said Jessica Cullen, managing director of Arthur J. Gallagher & Co.'s casualty practice, referring to her initial query to clients when sending in a submission for a tougher auto or general liability risk.

“That will make the account more marketable and more attractive to the underwriting community.”

The workers' compensation line has been that healthy across the national landscape.

Underwriting results have been sharper than any time in 80 years. There's plenty of competition in the majority of markets.

And most importantly, it remains a profitable business thanks to a robust job market and declining frequency of claims and underlying loss ratios.

Insurers have recorded an “unprecedented” seven straight years of positive financial performance, said Bill Donnell, CEO of the National Council on Compensation Insurance, in May.

The largest commercial insurance market is virtually the only line within property/casualty where rates are not rising. In fact, California, Florida, Oklahoma and Vermont are among the states that recently lowered rates. But still the space remains profitable.

“The workers' comp line is experiencing an unprecedented run of good fortune over the last at least five years,” said Mark Morneau, senior vice president and general manager, national insurance—East division at Liberty Mutual Insurance. “And it's really been driven by declining frequency of claims in the industry and generally muted severity.

“Medical inflation still impacts the workers' comp line, but frequency has outpaced that severity. So it's been a really strong run, and quite frankly, the line has bolstered the health of the primary P&C market.”

Some wonder how long that run will last.

Headwinds are building on the horizon, such as those falling state rates, a weakening United States economy and rising loss frequency in some pockets.


U.S. unemployment rate.

Source: U.S. Bureau of Labor Statistics

But the state of the market remains strong in the near term. Crisp underwriting, data analytics and wearable devices make the workplace safer and insurers better at assessing risk.

The combined ratio for private carriers during the 2018 calendar year was 83, the lowest since the 1930s, according to the NCCI's 2019 State of the Line Report. It was the fifth consecutive year that the industry posted an underwriting gain.

Workers' comp is “the oasis in the desert” for many P/C writers and brokers, Cullen said.

The insurance that covers the cost of medical care and rehabilitation for workers injured on the job and compensates for lost wages is the rare commercial coverage not suffering from rising frequency or excessive rate pressure.

While other lines of coverage require more and more work, workers' comp seems to be the only respite in overall multiline casualty placement.

“Workers' comp by far is the prettiest girl at the party, if you will, when it comes to the lines of coverage for casualty,” Cullen said. “It is the line of coverage that we utilize in helping soften out the other lines where we're seeing harder and larger increases.”

In a healthy economy, company payrolls grow thick, premiums increase and claims volume drops. And right now, the U.S. unemployment rate is at a near-historic low of 3.5%.

Industry net written premium increased to $48.6 billion in 2018. Meanwhile, the average lost-time frequency declined 1% last year, according to the NCCI, which serves nearly 40 state governments and more than 900 insurance carriers.

The council estimates private carriers' overall reserve position was a $5 billion redundancy as of the end of 2018—“and a redundant reserve position has not been observed in at least 25 years,” the report said.

“Carriers and brokers are probably doing a better job across the board at educating employers, working collaboratively with them to create the safest environments they can,” said Sean Conrad, a principal at EPIC Insurance Brokers &Consultants. “You also can't ignore a healthy economy. People working and making money just goes hand-in-hand with fewer frequency issues.”

While rating pressure is a growing concern, it has not clouded an otherwise rosy picture. 

“The good news is the pricing pressure that we're feeling in workers' comp is a function of the fact that returns have been very healthy for some time,” Travelers CEO Alan Schnitzer said in September at the Barclays Global Financial Services Conference. Travelers is the largest workers' comp writer in the nation, according to AM Best data. “It's not a health-of-the-line issue.”

Mark Morneau Liberty Mutual

The workers’ comp line is experiencing an unprecedented run of good fortune over the last at least five years. And it’s really been driven by declining frequency of claims in the industry and generally muted severity.

Mark Morneau
Liberty Mutual

A Safer Workplace

There is no silver bullet.

A combination of factors explains why frequency has declined and underwriting results have been so positive.

Safety measures mandated by employers have made workplaces safer. Carriers and brokers are playing integral roles, offering risk control and accident prevention expertise.

And insurers are mining historic data—not only from their workers' comp businesses, but from other sources such as group health.

That data helps to improve claimants' results, manage legal costs and reduce lost work time. These advancements could be mitigating the traditional volatility inherent in the space.

Data analytics and predictive modeling have revolutionized the way injury patterns are detected, root causes are identified and claims and lost time are prevented or mitigated. 

Predictive analytics has become “a really big item and one that is the focus of all clients,” Morneau said. Carriers are identifying and managing claims that could result in larger issues, longer absences and catastrophic outcomes. The proactive approach is producing more informed decisions on treatment, claims and safety.

Insurers and employers began collecting data about a decade ago, but have finally built a large enough pool to reap insights.

“It's more laser-focused in terms of what areas you need to invest in and put controls into place because of all the data points that people are collecting,” Cullen said. “Only in the past few years have they been able to figure out what to do with that data and actually get beneficial results from it.”

Advancements in telematics and wearables are providing timely information and enabling shorter feedback loops for underwriters.

The devices continue to progress, even if the relatively small sample size of data—and efficacy—they have provided remains an issue.

Insurers and brokers caution that they are not “a magic bullet,” but just part of the overall safety strategies weaved by employers, brokers and carriers.

“They're expensive. And look at the environment: People are making money right now,” EPIC's Conrad said. “Is there a big push to have wearables in place? Probably not.

“I don't think we have enough of those wearable devices out there yet and a big enough sample size to see what kind of a difference they can make.”

But wearables could grow in importance if the economy deteriorates. Employers and insurers might view them as a solution to the rising frequency, deteriorating underwriting and rate pressure that come with recessions.

“Technology has advanced over the past five years,” Cullen said. “Somebody could be wearing a sensor on them whether it's a FitBit or a heart monitor or even those little patches rugby players wear on the back of their shirts.”

Good health before an incident can prevent claims and reduce time lost to injuries. And some workers are healthier thanks to employer-sponsored incentives such as weight loss, smoking cessation and preventative care programs.

“Policyholders across the workers' comp spectrum are doing a much better job focusing on safety and the advancement of the cause,” Morneau said. “We're also continuing to see the advances of robotics and automation in the workforce.

“The advent of advanced automation, artificial intelligence and robotics is going to have the biggest impact on the environment just from a safety in the workplace perspective.”

Jessica Cullen Arthur J. Gallagher & Co.

Workers’ comp by far is the prettiest girl at the party, if you will, when it comes to the lines of coverage for casualty. It is the line of coverage that we utilize in helping soften out the other lines where we’re seeing harder and larger increases.

Jessica Cullen
Arthur J. Gallagher & Co.

Headwinds on Horizon

But the market can shift suddenly.

The national economy can sputter, weakening the job market. Regulation could further depress rates. Competition could shrink.

After all, it wasn't that long ago that the industry was struggling. Mired in the aftermath of the financial crisis, unemployment was high. Frequency rose. Combined ratios were well in excess of 100.

Some markets had few options, and even fewer private choices.

“This all could change very quickly if the economy tanks or if we lose a market because a carrier got gobbled up by somebody else,” Cullen said. “Those are the potential pitfalls that could change everything. When we see the economy start to dip, plants close, jobs are lost and you tend to see an uptick in workers' comp claims.

“What makes me a little nervous is: What's going to happen in 2020?”

Next year is an election year that could flip policy federally and state by state.

Meanwhile, the 2018 accident-year combined ratio rose to 97 from 96 in 2017, according to NCCI. (The calendar-year combined ratio fell to 83 from 89.)

“We see that trajectory still climbing,” Morneau said. “We had a good run, but we are now starting to experience headwinds. We do see signs of weakening in workers' comp.” 

A softening labor market may be the greatest threat.

The long-predicted recession in the United States may finally manifest itself in 2020 or 2021. Some economic indicators, such as an inverted yield curve, suggest a downturn is coming. That could disrupt the fragile balance and pricing stability that have ruled the landscape.

“As economies transition to more of a recessionary environment, we typically see a spike in workers' compensation claims as a result of loss of jobs and loss of income,” Morneau said.

Another formidable threat is the prolonged low interest rate environment. It especially hurts long-tailed businesses such as workers' comp. The Federal Reserve twice has cut historically low rates since July.

“That is a headwind that we are concerned about,” Morneau said. “If we do nothing as an industry with the low interest rate environment, our loss ratio will deteriorate. So that will probably will put pressure on us to increase rates in the future.”

W. Robert Berkley Jr., CEO of W.R. Berkley, attributed a 4.1% decline in his company's workers' comp net premiums written to competition and state rating pressure. And it is “being measured and cautious” due to concerns over a potential rise in frequency, he said during its second-quarter earnings call.

“We continue to think that comp is the one outlier ... that's transitioning in the opposite direction of everything else,” he continued. “You've seen action and you continue to see action by state rating bureaus that's pretty aggressive in our opinion.”

In other cases, margin compression stems from multiline insurers trying to win business by cutting rates—something they can't do in hardening markets such as commercial auto, property and liability. But that will be difficult to maintain if the economy changes.

“Insurance companies have been making money off workers' compensation,” Cullen said. “So for those accounts that maybe have a loss sensitive component, where they can offset their own rates, they're able to be a little more aggressive and apply higher credits because they want to win that business.”

The perpetual low rate environment has helped drive that discipline and a focused appetite. Carriers have not been able to make up for poor results through investment returns.

But if a recession occurs, rate hikes are almost inevitable.

“When the economy changes, then carriers will have to offset those decreases by increasing the rate,” Cullen said. “The exposures will go down drastically, and they're probably going to have to hike up the rates to get enough premium to keep it steady.”

Morneau also sees rate increases coming.

“What we've been seeing in the industry has been reserve releases of workers' comp because of this unprecedented run, and that reserve release has really been bolstering the profitability of the primary P&C market,” he said.

“But as we start to see these headwinds, like the accident year loss ratio deteriorates, and the other lines—in particular, property and liability—continue to experience pain, the workers' comp line will have no choice but to start to raise rates.”

Emerging Issues

A looming downturn is just one of many issues carriers are watching closely.

Opioids continue to be a pressing concern. Marijuana, both medicinal and recreational, and the burgeoning gig economy are emerging issues.

Although doctors, employers and insurers have long tried to curb access to opioids and closely monitor their use, the drugs remain “a real concern,” Conrad said.


Combined ratio for private workers' comp carriers for calendar year 2018.

Source: National Council on Compensation Insurance

Claims data from EPIC's workers' comp and workplace benefits teams indicate they continue to be widely used. Many of the most consistently refilled prescriptions are opioid-based, he said.

Morneau views the addictive class of painkillers as “absolutely still a concern.” But almost every insurer has protocols in place to track opioid prescriptions, monitor usage and review treatment.

“The carriers are all over this,” Cullen said. “They all have their opioid prevention plans and their own opioid nurse triage case managers.

“There's still going to be remnants of it. But everybody is conscious of it and very sensitive to it.”

Marijuana, on the other hand, is creating new challenges.

Each state has set its own course in determining medicinal and recreational guidelines—whether they prohibited use, legalized it or officially turned a blind eye. But cannabis remains illegal on a federal level.

“It's a brave new frontier for all of us,” Conrad said. “We are just getting a sense of what that world will look like.”

And whether it's legal or not, even if cannabis is prescribed as a workers' comp-related medication, it still could violate a company's drug and alcohol policy.

Another complicating factor is the promise CBD products show as substitutes for opioids in treating pain. Research into its efficacy remains largely unproven because it is illegal to study under federal law.

“Everybody is nervous to touch it because of the state and jurisdictionally dependent nature of it, whether it's legal, whether it's compensable,” Cullen said. “People are a little worried to have that as a prescribed medication. Everybody is still trying to figure it out, and nobody really wants to make the call.”

And then there's the changing nature of employment itself thanks to the emerging gig economy. Workers' comp has to evolve with it.

“There are a lot more independent contractors in play,” Cullen said.

It's a complex space with evolving laws and regulation—such as California Assembly Bill 5, the state law passed in September that reclassifies many independent contractors as employees. Of course, greater labor protections, including workers' comp coverage, often come with the employee designation.

Uber and Lyft have said they won't immediately shift their California drivers from independent contractors to employees. If they eventually must, the rideshare companies say they might need to establish shifts and limit when drivers can accept rides.

“Uber doesn't consider its drivers as employees. They're independent contractors, and companies don't have to provide comp for them,” Cullen said. “But under this recent California law, is Uber now going to be responsible for paying the workers' comp insurance for the thousands and thousands of people out there on the road?”

Of course, evolving regulation is nothing new for workers' comp carriers.

Another constant is rising medical costs and pharmaceutical prices. But for now, the business remains an oasis in the desert.

“Generally speaking, workers' compensation is probably the most stable and probably the most aggressive [competitively] in the marketplace from a casualty perspective,” Cullen said.


See Top 50 U.S. Workers' Compensation Insurers


California Illustrates Health of WC Market

A strong combined ratio. Stable claims frequency. Healthy competition.

And falling rates.

The state of California's $16 billion workers' compensation market can serve as a snapshot of the national industry, which has enjoyed a robust five-plus years.

“We actually have carriers making money in the state in workers' comp,” said Sean Conrad, a principal at EPIC Insurance Brokers & Consultants. “You can compare that to 1999. The combined loss ratio in the state was 200.

“We are seeing rates come down in workers' comp, but seeing a hardening market everywhere else in all of the lines of P&C. Your rates per $100 of payroll is about as good as it was in 1975, and you have plenty of choice in the market if you're a reasonably good risk.”

The state's combined ratio in 2018 was 90. It was the sixth consecutive year that carriers recorded a profit and light years from the “horrific” results they posted before reform legislation, according to Conrad.

Senate Bill 899, the 2004 workers' comp reform law signed by then-Gov. Arnold Schwarzenegger, reshaped the system. Since then, a combination of regulation and competition has driven down rates to levels not seen in four decades.

However, California's rates remain among the highest in the nation, according to Conrad.

“In 2004, we had a rate of $6.02 per every $100 of payroll,” he said. “If you can track that to this year, we're about $2.04 per every $100 of payroll. This is almost the same rate basis as we saw way back in 1975.”

Despite the declining rates, the market remains healthy.

“While we've seen a drop in total written premium, payrolls are ticking up in the state,” Conrad said. “That just speaks to the healthy economy, and generally speaking, things are good for employers.”

Total written premiums statewide were $17 billion in 2018 and $18.1 billion in 2016.

Before regulation, there was not enough competition, leaving the California State Compensation Insurance Fund—a public enterprise fund founded by the state—holding “the vast majority of the marketplace,” Conrad said. It remains the largest provider in California.

“It has shifted now to a very healthy, competitive environment paired with regulation that's driven down that rate per payroll,” he said.

A strong job market and tight underwriting are helping carriers remain profitable despite lower rates.

Will that stability and balance remain if the nation endures its first economic downturn since the Great Recession?

“If you have regulation that makes it challenging, if carriers can't make money here, then you end up with a situation like we did, which is State Fund having the predominant share because they're the carrier of last resort,” Conrad said. “A healthy state economy, a healthy job market, is keeping a healthy balance.”

Jeff Roberts is a senior associate editor. He can be reached at

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