The workers’ compensation industry had a pretty good 2014 in which its combined ratio improved for the third consecutive year, premium grew for the fourth consecutive year, and claim frequency declined about two percent.
But the results in 2014 were not enough to relax officials at the industry’s rating and statistical organization, the National Council on Compensation Insurance (NCCI).
NCCI, which is the official rating and statistical organization for more than 30 states, this week released its annual State of the Line workers compensation market analysis in which the group describes the current state of the industry as “calm now … but turbulence ahead.”
“The most recent results show that 2014 was a good year for the industry—and that follows solid results in 2013,” said NCCI President and CEO Steve Klingel. “It would be great if these results marked the beginnings of a new trend line, but ours is a business that runs in cycles. And despite the current calm conditions, we are anticipating turbulence ahead.”
He said 2014 results were in line with NCCI’s predicted trends.
NCCI says that among the challenges facing the workers’ compensation industry are that claim severity increased slightly more than inflation measures for indemnity and medical costs and a continuing low-interest-rate environment threatens investment results over the long term.
Also, while premium volume continues to increase, construction and manufacturing employment totals remain well below pre-recession levels, which is restraining even higher premium growth rates.
The American economy is in improving, Dr. Robert Hartwig, president and economist with the Insurance Information Institute I.I.I.), told the NCCI crowd.
He said the average private industry worker is working 34.5 hours a week, a number that is almost back to where it was before it plunged to 33.8 hours in 2008-2009 during the recession.
The average hourly wage was $24.87 in April of this year, up 17.2 percent from $21.22 when the recession began in Dec. 2007.
Despite the positive news, workers’ compensation continues to be less profitable today than before the recession. Hartwig said history suggests the next return on earnings peak will occur by 2017, but that is unlikely given unprecedented low interest rates.
Hartwig also noted that as employment increases so do exposure-based premiums, as new workers take on unfamiliar jobs.
Klingel was giving his last address to the audience at the NCCI’s annual issues symposium in Orlando, Florida. Klingel will end 42 years in the industry when he retires early next year.
The workers’ compensation calendar year combined ratio for private carriers was 98 in 2014, a four-point decrease from 2013. Total market net written premium increased by approximately 6% to $44.2 billion, driven primarily by an increase in payroll.
Klingel pointed to a number of trends that NCCI finds worrisome.
“From ongoing threats to exclusive remedy, to the risk of benefit increases without appropriate rate adjustments, to the rapidly changing nature of our workforce and workplaces, our industry is being tried on all sides today,” he said. “While I am confident that we will work our way through these challenges, it is important to be realistic about current conditions and to recognize that the current positive results may not last.”
NCCI Chief Actuary Kathy Antonello took a similar approach– refraining from expressing too much joy over the improvements in 2014 because of the dangers ahead.
She welcomed that the combined ratio fell below 100 for the first time since 2006, that there was a second year of above average operating gains, and that 2014 saw a continued decline in claim frequency.
“On the other hand, indemnity and medical severity increases have begun to outpace increases in the average weekly wage and medical consumer price index, low interest rates continue to make investing a challenge, and employment in some sectors of the economy—particularly construction and manufacturing—remains well below pre-recession levels,” Antonello said.
The calendar year combined ratio for private carriers of 98 for 2014 was driven primarily by a decrease in the loss ratio. The calendar year combined ratio has improved 17 points since 2011. The accident year results also showed improvement in 2014, falling four points to a combined ratio of 95.
Other market indicators and trends highlighted in NCCI’s 2015 State of the Line report include:
- The calendar year 2014 underwriting results combined with investment gains on insurance transactions produced a workers compensation pretax operating gain of 14% for 2014.
- The overall reserve position for private carriers further improved in 2014. NCCI estimates the year-end 2014 reserve position to be a $10 billion deficiency for private carriers—down from $11 billion in 2013.
- Lost-time claim frequency maintained a path of decline in 2014—down 2%, on average, in NCCI states.
- In NCCI states, the average indemnity cost per lost-time claim increased by 4% in 2014, following increases of less than 2% each year from 2011–2013.
- Similarly, the average medical cost per lost-time claim increased by 4% in 2014—following increases of 2–3% in each of the prior three years.
- Last year marked the fourth consecutive year of workers compensation residual market premium growth. Premiums grew by approximately 7% in 2014, while the average market share in the residual market held steady at 8%. NCCI’s latest data shows that total residual market premium declined in the first quarter of 2015 compared to the first quarter of 2014.
- Despite the growth in premium volume, the residual market policy year combined ratio held steady at 106 in 2014. The total underwriting loss in the residual market pools serviced by NCCI grew to $74 million, up slightly from $64 million in 2013.
Denise Johnson, editor of ClaimsJournal.com, contributed to this report.
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