Workers compensation insurers have taken a beating from both the soft insurance market and the recession, which has reduced the number of employees that companies need to insure. The industry's written premium dropped 23% in the last two years, according to a recent report from the National Council on Compensation Insurance (NCCI), which tracks workers comp data.
The workers comp industry's combined ratio--the percentage of premiums paid out in expenses and losses--jumped to 110% last year from 101% in 2008, according to NCCI, which says that's the biggest one-year increase since the mid-1980s.
The organization describes the industry's position as "precarious" and cites other challenges facing workers comp insurers, including the low interest rates currently earned on investments, the possible effects of healthcare reform, the prospect of changes to U.S. financial regulations, and the rate at which the economy and employment will pick up speed.
But Pam Ferrandino, executive vice president and national casualty practice leader at insurance brokerage Willis, says that combined ratio of private insurance companies "is not anything that alarms me. Presumably you've got a longer tail on the life of a workers comp claim, so with a combined ratio of 110% the carrier has the opportunity to earn investment income to cover the combined ratio."
On the plus side, NCCI reports that increases in medical costs have moderated, averaging between 5% and 5.5% a year in four of the last six years, after posting double-digit increases in the late 1990s and early 2009s.
In other good news, the frequency of workers comp claims declined 4% in 2009, following a 3.4% fall in 2008 and a 3% decrease in 2007.
NCCI says the recession contributes to those declines because as companies cut back on hiring, their employees have more experience and are less likely to be injured.
"The most important thing right now is for risk managers to make sure they've got their programs well controlled, that they make the actual investment in training and risk control, so that as they add new employees, they're able to maintain the favorable loss experience," Ferrandino says.