NCCI Holdings Inc. has released its annual “State of the Line” preliminary workers’ compensation market analysis. More information is available at www.ncci.com
This year’s report indicates that the industry’s combined ratio for Calendar Year 2003 is 108 percent, a 3-point improvement from 2002. The improvement in the combined ratio for 2003 marks the second consecutive year of improvement in workers’ comp market results.
Despite this improvement in the calendar year combined ratio, NCCI continues to see a market in transition, with both positive and negative indicators for the immediate future.
On the negative side, profitability remains under pressure from low interest rates, reserving issues remain troublesome, and medical inflation rates continue to increase—not to mention the effect of terrorism exposures and the uncertainty surrounding the possible expiration of the Terrorism Risk Insurance Act of 2002 (TRIA).
Accordingly, NCCI’s outlook for the workers’ comp industry remains cautionary.
This is not to say that the workers’ comp market outlook is entirely negative. As discussed below, the accident year combined ratio has improved and stands at 101 percent, while claims frequency continues to decline.
NCCI reports that investment income associated with workers’ comp insurance transactions rose slightly from 2002 to a projected 13 percent of net premium. This is down dramatically from the late 1990s and 2000, when the ratio was around 20 percent and was buoyed by higher interest rates and realized capital gains on stock and bond portfolios.
Combining the investment gains with the underwriting results leaves the workers’ comp line with a modest pretax operating gain of about 5%.
Although this is a significant improvement from 2001 and a better result than 2002, this operating profit is well below the needed pretax operating gain of 10 percent, which would allow the industry to earn its cost of capital.
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