Comp Industry Reaches 30-Year High: NCCI

ORLANDO, FLA.--The nation's largest workers' compensation rating organization announced today that the comp market in 2006 had its best underwriting result in 30 years.

The National Council on Compensation Insurance also reported that calendar year combined ratio for comp insurers was 96.5 the first underwriting profit for the line since 1995.

NCCI's statistics were unveiled at the organization's Annual Issues Symposium here, which drew more than 700 attendees.

With the good news came a caution, however. NCCI Chief Actuary Dennis Mealy, in a statement released prior to his "state of the line' briefing at the meeting, warned that "despite excellent underwriting results, it is important to note that the record low interest rates of recent years--as well as the industry's need to strengthen its reserve position--made these types of results a necessity."

He also mentioned that the impact from California, where legislative reforms are still having a large effect, have seriously skewed results in a positive direction.

According to NCCI, although the underwriting results are the best in decades, the returns after investment income and federal taxes show that returns on surplus supporting the business are not close to record levels, and only modestly above the average for the last 20 years due to the low levels of interest rates in recent years.

The 2006 workers' comp calendar year combined ratio--at 96.5--showed a 6.5 point improvement over 2005 and a 25.5 point improvement from the current cyclical peak of 122 realized in 2001, NCCI reported.

On an accident year basis, NCCI said, the workers' comp insurance industry had its fourth straight year of underwriting profits. NCCI estimated the combined ratio for the 2005 and 2006 accident years at 87 and the 2004 accident year at 88. This is more than a 50-point improvement since the 140 combined ratio earned in 1999.

While reporting positive results for both calendar and accident years, NCCI pointed out the significant impact California has on countrywide numbers.

It noted that if California's results were excluded the calendar year net combined ratio would rise about 10 points to over 105.

NCCI found a similar impact on the accident year combined ratio: excluding California from the accident year combined ratio would rise from 87 to 95.

"This somewhat dampens the overall results for the entire country, and it reminds us of the distortions caused by a single large state that is adjusting to its post-reform environment" the firm noted.

Workers' compensation insurance prices also declined in California and Florida in 2006.

NCCI said those states experienced significant price declines as reforms there favorably affected costs and improved marketplace conditions. In addition, NCCI said, national claims frequency trends continue to be favorable and, along with wage increases, are offsetting medical and indemnity cost increases--allowing for a generally stable loss cost environment.

In terms of private carrier workers' comp reserve position, NCCI found 2006 marked another year of improvement. NCCI's estimate of the reserve position for the private carriers as of December 2006 showed a slight $4 billion deficiency.

This is a $5 billion improvement from year-end 2005, NCCI said. After allowing for discounting of the indemnity reserves for lifetime pension cases, the reserve position is slightly more than adequate, according to NCCI.

Stephen J. Klingel, NCCI president and chief executive officer said, "As always, in a cyclical, long tail line such as workers' compensation insurance, we need to be mindful of those challenges that threaten to negatively impact our business. These include skyrocketing medical costs, low investment returns, a changing political landscape, and the projection that the current underwriting cycle is likely at its peak."

He said if the industry is to continue to improve its financial performance, "these items will need attention in the months to come."