The workers’ compensation market continues to perform well from a profitability standpoint relative to other casualty lines. This positive performance is a trend that has been in place for several years and is likely to continue through 2020. Some factors driving this trend are falling loss costs and relatively benign claim severity, as well as increased competition in the insurance marketplace.
There has been a decline in loss frequency in the workers’ compensation market for many years. Douglas Dirks, president and CEO at Employers Insurance Company (EMPLOYERS) – a publicly traded national insurance carrier that specializes in workers’ compensation – suggested the decline in loss frequency is “a reflection of the movement of the US economy from manufacturing to service” which has been happening for decades.
He added: “I do believe workplaces are safer today than they have been historically. Again, that’s a longer-term trend, and I believe that employers, regulators and insurers have taken that subject much more seriously in recent years and been more focused on maintaining a safe workplace.
“In terms of what’s happened on the claims cost side, and maybe severity, there have been great gains made in medical management of claims really driving better outcomes for injured workers, and, consequently, better outcomes financially for insurers. That combined with the declining frequency trend, and you see a general overall decline in loss cost virtually everywhere.”
Unlike the wider property / casualty insurance market, which is experiencing quite dramatic hardening - especially in catastrophic property, commercial auto and certain professional services lines – the workers’ compensation insurance market remains soft. In fact, it has been relatively soft for so long that some people are saying the traditional insurance cycle in workers’ compensation is dead.
Dirks argues the opposite and remains adamant that the market will turn at some point, albeit not in 2020. Halfway through 2019, EMPLOYERS made the decision to increase rates in California – a move that no-one else has yet gone for. While their renewal business held up, the firm saw a fairly immediate reduction in new business following the rate change, highlighting how competitive and price-sensitive the California market remains, despite EMPLOYERS believing it’s at an inflection point.
“We continue to see a very strong economy in California in terms of payroll growth and new unit growth. It’s still a very attractive market for us. We just have a view that pricing got ahead of favorable loss trends, and we’re just not going to follow that to the bottom,” Dirks told Insurance Business.
“What could change the market from a soft to a hard market?” he asked. “There has been more than one instance in my career where that market shift was because California became extremely unattractive. Given its size - California represents nearly 25% of the US workers’ compensation market – when California goes bad, it can influence the rest of the market. We have a lot of experience and a lot of insight in the state, and we just looked at it and said we’re not going to follow it to the bottom. We’ll see if the rest of the market comes to our point of view this year.”
Despite making the move to increase rate in California in 2019, Dirks said he does not expect the national marketplace to harden up any time soon. Loss costs continue to decline in almost all states, meaning rate decreases will likely continue in tandem.
“The declining rate environment will still have a significant impact on the industry’s top line and to the extent that there are market participants who are focused on maintaining top line with little regard to profitability, that will keep this market soft for a longer period of time – and I think 2020 will look that way,” he added. “At EMPLOYERS, we’ve taken the other view, which is that we’re going to focus on the bottom line, and the top line will be what it is based on the underlying market conditions. That’s why we took the action we did in California.
“I would also expect, given what the federal government announced in December, that we will probably see a relatively stable fixed income market in 2020, and since most of the industry’s investment balance sheet is tied to fixed income securities, I think we’ll see flat to potentially declining yields for the industry balance sheet. That could have the effect of extending the soft market a little bit longer.”