Workers' compensation insurers have seen net written premium shrink 23 percent from 2007 to 2009, with millions of layoffs in the ongoing economic downturn taking a toll on insurable exposures, the chief executive of the National Council on Compensation Insurance reported here.
Workers' comp written premiums have been disproportionately affected by the economic downturn's impact on the construction and manufacturing sectors, said Stephen Klingel, CEO of NCCI Holdings Inc., speaking at the organization's Annual Issues Symposium.
Mr. Klingel said wages that go into premium calculations for workers' comp were down 4 percent from 2007 to 2009.
One reason for the premium slump, he noted, is that the construction and manufacturing businesses impact workers' comp premiums the most of any sector, and with those two areas hit particularly hard by the recession, insurers are feeling a more acute effect.
"The workers compensation insurance industry had a trying year in 2009," said Mr. Klingel. "And a series of unknown factors--from the pace of economic recovery to the long-term impact of the new federal health care law, among others--leave the line in a precarious position and facing a host of challenges moving into 2010."
NCCI's chief actuary, Dennis Mealy, added that smaller firms in general, which normally buy full workers' comp coverage, have been impacted by the recession from an insurance-purchasing perspective more than larger firms, which tend to self-insure to some degree, further pressuring net written premiums.
The downward trend has been particularly strong the past two years--2008-2009--according to Mr. Mealy, who said workers' comp net written premium declined 11.8 percent in that span.
Net written premiums for the total property and casualty insurance industry were down 3.7 percent in that same period, Mr. Mealy noted. P&C net written premium has now fallen for three straight years--the longest decline since the Great Depression, he added.
All commercial lines saw net written premiums drop, but workers' comp fell more steeply than all sectors except fire and allied lines, which fell 14.5 percent, NCCI reported. Personal auto and homeowners were notable exceptions, with net written premiums rising 1.2 percent and 1.3 percent, respectively, NCCI pointed out.
Meanwhile, the combined ratio for workers' comp private carriers was 110 in 2009--the worst figure since 2003, which was also 110, Mr. Mealy told attendees.
"After the prior three years of an underwriting profit followed by two years of minor underwriting losses, the combined ratio for workers' compensation shot up nine points in 2009--the largest single-year increase since the mid-1980s," he said.
Investment returns of 11.8 percent for workers' comp private carriers in 2009 represented a 2.1 percent increase compared to 2008, but is still below the 14.8 percent industry average from 1990-2008, said Mr. Mealy.
On the positive side for workers' comp insurers, Mr. Mealy said the industry remains well-capitalized to meet its obligations. Claim frequency has also continued to decline, he noted, dropping 4 percent in 2009, following dips of 3.4 percent and 3 percent, respectively, the prior two years.
The improvement is even more dramatic from a longer-term perspective, with claim frequency down 54.7 percent from 1991-2008, Mr. Mealy reported.
Residual market shares also continued to decline for NCCI Plan states Delaware, Indiana, Massachusetts, Michigan, New Jersey and North Carolina, Mr. Mealy said.
He noted that 5 percent of direct written premium was in the residual market in those states in 2009, down from 6 percent in 2008. That number has declined since 2004, when 13 percent of direct written premium was in the residual market.
Despite continuing doubts and uncertainties regarding the economy, a noted insurance economist offered some good news to workers' comp insurers, saying the recovery is self-sustaining and that the p&c industry will see growth in 2011.
Speaking at the symposium here, Insurance Information Institute President Robert P. Hartwig said he does not expect a "double dip" recession, and does not foresee a secondary spike in unemployment or swoon in payrolls.
"This era of mass explosive destruction, particularly in the commercial lines space, including workers' compensation...I believe that has ended as well," Mr. Hartwig said.
The results of a recovery, he warned, may not be immediately apparent. He noted that exposure growth will lag behind, but could become evident in the second half of this year and begin to accelerate in 2011.
Along with a recovery, the industry can expect to see an increase in demand for commercial insurance products, including workers' comp, Mr. Hartwig observed.
"The p&c insurance industry will see growth in 2011 for the first time since 2006," he said. "For five years we have not seen growth in this business."
The gains will not be dramatic, he cautioned, predicting the industry can expect 2.5-to-3 percent growth over the next two years.
The industry, he continued, has recovered over 100 percent of capital lost during the financial crisis. While that is a good message to take to Washington, reflecting the industry's resiliency, Mr. Hartwig also said it is a reason why the commercial insurance market remains soft.
He said there is record capacity chasing "greatly depressed exposures."
Mr. Hartwig said the future after the recession will not be like the past.
While NCCI executives talked earlier about the bulk of workers' comp premiums coming from manufacturing and construction, Mr. Hartwig said the fastest growing industries coming out of the recession will be in the health, science and technology sectors.
In related news, John T. Leonard, president and CEO of the MEMIC Group, was elected to chair NCCI's board.
Mr. Leonard has been a member of the NCCI board since 2007, serving on the Finance, Compensation, and Nominating Committees. He was also a board member from 1995 to 1997.
Mr. Leonard has been president and CEO of Portland, Maine-based MEMIC since the company's inception in 1993. During his tenure, MEMIC has grown to be licensed in 45 states plus the District of Columbia.
Mr. Leonard also serves as chair of the board for ACORD, the industry standards-setting organization.
NCCI analyzes industry trends, prepares workers' comp rate recommendations, determines the cost of legislative proposals and provides other services and tools to the comp insurance market.