California, the nation's largest market for workers' compensation insurance, has recently produced strong results in stark contrast to the market crisis of the late 90s and early 2000s. However, the market is starting to show signs that results have hit an inflection point.
While results are likely to deteriorate going forward, the rate of change will be primarily influenced by market participants and their willingness to maintain pricing discipline in the face of an increasingly competitive landscape.
In assessing the market, it is important to consider factors that contributed to the recovery as well as threats to the current market performance. Fitch views the market recovery to be a function of three key factors: sharp rate increases facilitated by the removal of na?ve and excess underwriting capacity, the favorable impact of reforms on loss costs, and altered behavior of the State Compensation Insurance Fund (State Fund), California's residual market facility.
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