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WC Results Improve, But Line Still In The Red

Soaring medical costs puts combined ratio at an unhealthy 108, down three points

The workers' compensation insurance line remained in the red last year despite a three-point improvement in the combined ratio to 108, the premier service organization for the industry announced last week.

This was the second consecutive year that the National Council on Compensation Insurance has recorded a better ratio for the industry's latest calendar-year. Still, the Boca Raton, Fla.-based NCCI said terrorism risks and other factors make the workers' comp industry outlook “cautionary.”

However, the workers' comp sector was found by NCCI to have made a modest profit, with a pretax operating gain of 5 percent.

The data was discussed in Orlando at the NCCI Holdings Inc. annual conference by Dennis Mealy, NCCI's chief actuary, delivering his “2003 State of the Line” report.

On the positive side, NCCI noted that claims frequency continued to decline, while the combined ratio for the industry's accident year had improved to 101. (The combined ratio is the percentage of each premium dollar that goes toward claims and expenses; when it exceeds 100, it indicates an underwriting loss. The accident year measures premiums and losses relating to events that occurred during a particular 12-month period, while the calendar year is based on earned premiums and booked incurred losses for an annual reporting period, regardless of the dates of the loss.)

NCCI said that it was concerned that workers' comp insurer investment income was 13 percent of net premium, “down dramatically from the late 1990s and 2000, when the ratio was around 20 percent.” Lower interest rates and fewer capital gains on stock and bond portfolios were to blame, NCCI said.

The organization said that besides terrorism exposures and doubts about whether the federal reinsurance backstop program under the federal Terrorism Risk Insurance Act would be continued past 2005, the workers' comp sector remains troubled by medical inflation and reserving issues.

Mr. Mealy, in a statement released at the time of his appearance, said the group continues to research catastrophic risks for workers' comp including domestic terrorism, earthquakes and large industrial accidents. He noted that NCCI will soon use such numbers in its suggested rate filings for the states it provides with data.

The organization noted that polices written in the third and fourth quarter of this year would have some exposure at the end of 2005, when TRIA might expire unless Congress votes to extend it.

NCCI said private workers' comp insurers had brought down their reserve deficiencies by $15 billion, but the reserve boosts had caused calendar-year underwriting results to lag behind other lines.

Soaring medical costs driven by prescription drugs and increased utilization continuing bugaboos for the workers' comp system slowed down a bit, NCCI said. The group found claim cost severity at 9 percent in 2003lower than the 11-to-12 percent range in the previous two years.

Premium volume for the industry in 2003 increased for a fourth-straight year, rising 13 percent to over $42 billion, NCCI reported. Noting the impact of state funds, NCCI said the premium volume increase for private carriers was a more modest 7 percent.

Frequency of lost-time accident claims continued a 10-year trend of declines, as NCCI found that such claims were down 3 percent.

NCCI reported that workers' comp residual market pools increased last year to $1.4 billion of premium. While the pace of growth in 2003 was slower than the year before, residual pools represent 12 percent of the total market in states that have residual markets.

An upward trend was found by NCCI for approved bureau rate/loss costs, increasing nearly 7 percent in 2003, NCCI said.

Reproduced from National Underwriter Edition, May 10, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.