The Workers' Compensation market is continuing to improve asrates increase and exposures grow, but signs point to a continuedunderwriting deficit through this year, according to a report fromFitch Ratings.

Fitch's “Workers' Compensation Insurance Market Update,” says,after a long period of decline, rates have increased for twoconsecutive years “with little sign that pricing trends willreverse in the near term.”

The report notes the Council of Insurance Agents & Brokersmost recent P&C lines survey says workers' comp rate hikesjumped close to 10 percent in the first quarter of 2013. Thereport notes that a Marketplace Realities report from insurancebroker Willis North America Inc. predicts rates going up 2.5—10percent, with more than 20 percent increases projected in theunderperforming California market.

Added to the improving state of workers' comp, premium volumehas grown benefiting from rising rates and increased insuredexposure gains due to the “modestly improving economic andemployment conditions.” Volume rose by 7 percent in 2012, thelargest of all major commercial insurance market segments, saysFitch.

However, workers' comp continues to not show an underwritingprofit and “has been the worst-performing major commercial linessegment for some time.” While the aggregate combined ratio improved7 points to 110 in 2012, Fitch projects the combined ratio shouldimprove further to 105 by the end of 2013. The rating servicecredits better pricing on the loss ratio and revenue growth“modestly reducing expense ratios.”

The cost of healthcare greatly influences workers' comp costs,Fitch notes, and those cost factors “tend to expand at a higherrate than general inflation.” The costs were “a bit more stable” in2012, but how sustainable that trend is remains in question withthe implementation of the Patient Protection and Affordable CareAct, which will determine future volatility in workers' compclaims.

Overall, Fitch says given worker's comp represents 18 percent ofthe P&C industry commercial lines net written premium, coupledwith market hardening and underwriting improvements promotingearnings stability, Fitch says insurers are viewed “favorably froma credit perspective.”