The workers’ compensation industry reported a record high $58.5 billion in direct premiums written in 2016 but year-after-year growth slowed for the first time in five years.

Growth deceleration was due largely to rate decreases in 2015 and 2016, according to the A.M. Best report “Workers’ Compensation: Costs, Legal Activity and Employment Rolls Are Increasing—But So Are Profits.”

The report explains that despite the $58.5 billion in record premiums, net premium growth declined to 0.2 percent after expanding at a five-year compound annual growth rate of 6.3 percent from 2010 to 2015.

The deceleration in growth is also due to an increase in net ceded premiums, according to the report that notes the property/casualty industry overall has increased its use of reinsurance for the workers’ compensation line since the 2008 financial crisis, ceding nearly 50 percent more of this business than before the recession.

Although loss experience has improved in recent years, in part evidenced by a 95.5 combined ratio in 2016, A.M. Best said it believes that reserves for the workers’ compensation line remain deficient. The ratings analysts estimate the deficiency at approximately $22.1 billion as of year-end 2016, which is a $1.7 billion improvement from A.M. Best’s 2015 estimate.

Despite that improvement, A.M. Best said it remains concerned about reserves given the increases in the estimated reserve deficiency in five of the last eight years, as well as the overall rate decreases since 2015. According to the report, loss reserve adequacy is especially important for this line because of the long-tailed nature of the line’s liabilities. As of year-end 2016, workers’ compensation reserves accounted for $166 billion or 26.9 percent of the total U.S. P/C industry’s $620 billion loss reserves.

Since adverse reserve development is one of the leading causes of insurer insolvency, the ratings agency noted that reserve adequacy remains a critical component of its credit rating process.

A.M. Best also analyzes the overall health of the workers’ compensation line of business through its Workers’ Compensation Composite (WCC), which is composed of U.S. companies (including state funds) whose workers’ compensation and excess workers’ compensation net premiums constitute 50 percent or more of their total net premiums. As some of the larger writers have decreased their exposure to the workers’ compensation business, specialist writers (included in the WCC) have assumed this business. The WCC accounted for 44.8 percent of all U.S. workers’ compensation net premiums compared with 33.8 percent in 2010.

Currently, A.M. Best has a negative outlook on the U.S. commercial lines segment, of which workers’ compensation is the largest component, and recognizes that workers’ compensation insurers remain under pressure due to decreasing rates and increasing competition. Nevertheless, improved loss experience from a decline in frequency and the leveraging of technology greatly benefitted companies’ bottom lines in 2016, A.M. Best noted. Unemployment has decreased steadily since 2010, and workers’ compensation premiums have an inverse relationship with the unemployment rate.

However, A.M. Best notes that long unemployment rate declines are typically followed by sharp spikes in unemployment, and its analysts believe that workers’ compensation writers should expect payroll and premium growth to halt sooner rather than later unless wage growth accelerates.

Source: A.M. Best