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OCTOBER 11, 2016 10:22 AM (EDT)

A.M. Best Special Report: U.S. Workers’ Compensation Delivers Underwriting Profit Despite Rate Deterioration


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 Connor Brach
Associate Analyst
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Gordon McLean
Senior Financial Analyst
+1 908 439 2200, ext. 5304
gordon.mclean@ambest.com
Christopher Sharkey
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Jim Peavy
Director, Public Relations
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FOR IMMEDIATE RELEASE

OLDWICK - OCTOBER 11, 2016 10:22 AM (EDT)
The U.S. workers’ compensation industry experienced solid underwriting performance in 2015 as a result of continued premium growth, technological advancements, declining frequency trends and favorable levels of reserve development, according to a new A.M. Best special report.

The Best’s Special Report, titled, “U.S. Workers’ Compensation Delivers Underwriting Profit Despite Rate Deterioration,” states that during 2015, the combined ratio improved 5.5 points to 96.0, marking the fifth consecutive year of solid underwriting performance.

Net premiums written (NPW) for the workers’ compensation line in 2015 totaled $48.2 billion, a year-over-year increase of 2.9%, which compared with growth of 1.1% in NPW for the overall commercial lines segment. Although the rate of premium growth has consistently declined from 2012, payroll growth in an improved economic climate, combined with ongoing rate increases in some jurisdictions, drove additional growth in NPW during 2015. Since 2010, sustained premium growth has benefited the line’s performance, with NPW volume in 2015 reaching its second highest level since $49.7 billion in 2006.

State funds comprise a large portion of the workers’ compensation composite and significantly influence the segment’s underwriting results. Three of the four largest companies in the workers’ compensation composite—State Insurance Fund WC Fund, State Compensation Insurance Fund of CA and Texas Mutual Insurance Company are state funds and have accounted for over 20% of the composite’s overall premium volume in recent years.

However, despite the improvement in operating performance, rates have declined every quarter since the start of 2015, with a 4.3% drop in the second quarter of 2016. These quarterly rate declines create some uncertainty on how long the improved underwriting results can be sustained.

A.M. Best also remains concerned about the adequacy of the industry’s overall loss reserve position. A.M. Best estimates that the loss and loss-adjustment expense reserve position for the workers’ compensation line was deficient by $23.8 billion (including statutory discount) at year-end 2015, down from an estimated $26.2 billion in 2014. While the estimated reserve deficiency declined during 2015 relative to the prior year, A.M. Best’s estimate of the deficiency within the industry’s carried reserve position has increased during six of the most recent eight years. Although over 60% of the deficiency is due to statutory discounting, the ultimate adequacy of the industry’s reserve position remains uncertain for earlier accident years when rates were at their low point.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=254513 .

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