Pricing, Loss Severity Uncertainty Pose Workers Compensation Concerns

US workers compensation insurers' results will continue to benefit from a long-term trend of claims frequency improvement due to improved safety and risk management practices along with the recognition of loss reserve redundancies from prior underwriting years, according to Fitch Ratings.

Still, unfavorable pricing trends, competitive market conditions, and the potential for worsening loss trends due to inflation and macroeconomic pressures could result in increased loss severity, particularly in the area of medical costs, Fitch said.

The rating agency noted that property-casualty insurers faced significant underwriting challenges in 2022 as inflation, economic disruption, and ongoing effects from the COVID-19 pandemic led to loss-cost uncertainty. Under those conditions, workers compensation remained the industry's best-performing coverage line, Fitch said, with an average combined ratio of 90 percent from 2017 to 2021. That combined ratio should change only modestly in 2022, according to Fitch.

Workers compensation is one of the largest commercial insurance product lines in the US property-casualty market, with more than $43 billion in net written premiums in 2021, Fitch said. Meanwhile, after several years of flat to declining premium volume, direct premiums increased 8.3 percent through the first three quarters of 2022, the rating agency said. Fitch is projecting a full-year 2022 combined ratio of 92 percent for the workers compensation segment.

That level of premium growth is probably unsustainable, according to Fitch. While other commercial lines have been hardening, workers compensation premium rates have been flat to down for several years, largely as a result of the segment's positive performance, the rating agency said.

The possibility of prolonged high inflation is a growing concern for the workers compensation segment, Fitch said. While medical inflation had been stable during the period of strong workers compensation performance, it's beginning to accelerate. In addition, larger jury verdicts, litigation settlements, and defense costs are affecting insurers across numerous casualty and liability segments, Fitch said.