Workers Compensation Performance Expected To Remain Strong in 2021

Workers compensation underwriting performance is expected to remain strong this year with favorable results driven by recent reductions in claims frequency and further recognition of material reserve redundancies, according to Fitch Ratings.

The current level of profitability is unsustainable over the longer term, however, as claims trends are expected to normalize while competitive forces create renewed pricing pressure, Fitch said.

The workers compensation segment posted a third consecutive year of combined ratios at 90 percent or below in 2020, the rating agency said. That 2020 combined ratio performance came despite a 10 percent reduction in annual written premiums due to the economic disruption resulting from the COVID-19 pandemic, according to Fitch, adding that the pandemic also led to a sharp decline in claims frequency versus 2019.

Pandemic-related losses, particularly for essential services and healthcare providers thus far, are manageable for workers compensation insurers but remain a source of uncertainty, Fitch said. The sector's combined ratio is expected to remain in the low 90 percent range for 2021, according to the rating agency.

Workers compensation continues to demonstrate the strongest reserve position of any property and casualty line, Fitch said. "The segment's reserve strength was likely maintained in accident year 2020, as reported loss ratios may have underestimated the benefits of declining frequency on incurred losses," a Fitch statement said.

While other commercial property and liability lines have reported rising prices for the last 2 years, workers compensation premiums declined in response to favorable results, though pandemic-related uncertainty led to a stabilization of pricing in 2020. "However, a return to normal economic activity and market competitive forces are expected to result in declining rates by year-end 2021," Fitch said.

"Claims frequency patterns are anticipated to normalize with the return to prior workplace norms and economic activity," Fitch said. "Loss severity has been relatively stable in recent years but remains a greater source of future volatility with rising general inflation and the potential for higher future medical costs."