US Workers Compensation Market Likely To Post Strong Profits in 2020

US workers compensation insurers are poised to report strong profitability this year, despite economic challenges from the COVID-19 pandemic, according to Fitch Ratings.

Fitch noted that declines in economic activity resulting from the pandemic led to reduced claims frequency that is currently outpacing pandemic-related losses.

However, underwriting performance in 2021 and beyond will likely deteriorate, the rating agency said, as claims activity normalizes with increased worksite business activity and premium revenue continues to fall amid recent underwriting exposure reductions and competitive pricing forces.

Workers compensation insurance has been the most consistently profitable segment in the US commercial lines market over the last five years, Fitch said, with a 91 percent average statutory combined ratio from 2015 to 2019.

The rating agency said that while events remain "highly fluid," year-to-date overall workers compensation results remain favorable. Reports are showing that claims frequency is down considerably, Fitch said, likely due to the slowdown in economic activity, with sharp reductions in employee time spent in the work space.

The California Workers Compensation Insurance Rating Bureau reports claims frequency during this year's second quarter versus 2019's second quarter was down 10 percent for indemnity claims and 33 percent for medical-only claims, the rating agency noted.

Pandemic-related long-term or catastrophic claims have also been limited to date, Fitch said. There is, however, uncertainty regarding longer-term health implications for more severe COVID-19 cases, including the potential for major organ damage and other chronic conditions that would ultimately increase workers compensation costs. Pandemic-related cases represent 7.4 percent of year-to-date claims paid, Fitch said, 99 percent of which were settled for payments of less than $10,000, according to the Florida Division of Workers Compensation's 2020 COVID-19 report.

Due to prior profitability, workers compensation is the only major commercial lines segment not experiencing significant premium rate increases, Fitch said, with first-half premiums declining from the same period last year.

Negative pressure on premiums may pause briefly amid current economic uncertainty, the rating agency said, but won't meaningfully subside over the next few years. Future premium volume will depend on the pace of the economic recovery, Fitch noted.