The workers' compensation market in 2006 had its best underwriting result in 30 years, but insurers should be aware of some of the mitigating circumstances and the challenges ahead before celebrating, according to the National Council on Compensation Insurance.
The industry posted a calendar-year combined ratio of 96.5, the first underwriting profit for the line since 1995, noted NCCI during its annual symposium here.
However, NCCI Chief Actuary Dennis Mealy added some words of caution in a statement released prior to his "state of the line" briefing at the meeting. "Despite excellent underwriting results," he warned, "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 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 in fact are 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 of 96.5 was a 6.5 point improvement over 2005, NCCI reported, and a 25.5 point improvement over the current cyclical peak of 122, which was realized in 2001.
NCCI added that on an accident-year basis, the workers' comp industry had its fourth-straight year of underwriting profits.
NCCI estimated the combined ratio for the 2005 and 2006 accident years at 87, and for 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. The group 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, 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," NCCI noted.
Workers' comp prices also declined in California and Florida in 2006. NCCI said those states experienced significant price drops 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 hikes, allowing for a generally stable loss-cost environment.
In terms of the reserve position for private workers' comp carriers, NCCI found that 2006 marked another year of improvement. NCCI's estimate of the reserve position as of December 2006 showed a $4 billion deficiency–a $5 billion improvement from year-end 2005.
After allowing for discounting of the indemnity reserves for lifetime pension cases, the reserve position is slightly more than adequate, according to NCCI.
"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," said NCCI's president and chief executive officer, Stephen J. Klingel.
Such challenges, he added, "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."
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