The workers' compensation insurance sector's rising profits may face a threat now from increasing accident year losses, according to a new study by Conning Research and Consulting.
Insurers who address the root causes of severity growth can protect their profitability, the report noted.
Mark Jablonowski, analyst at Conning Research & Consulting, said the workers' comp line of insurance has seen a steady decrease in frequency over the past ten years.
"But total incurred losses are climbing and continue to be driven by [individual claim] severity," he said.
Focusing on severity factors such as the cost of medical services, utilization rates, and claims management can help to control the overall severity of loss.
"The 'missing link' may be attention to injury prevention," said Mr. Jablonowski.
The chief concern today is the increase in loss severity in the face of a softening market.
The largest driver of severity remains medical costs, which in workers' comp are growing at more than twice the rate of the medical consumer price index, the report notes.
But, there are also more fundamental drivers of severity inherent in the root causes of claims, said Stephan Christiansen, director of research at Conning.
"By addressing these components of severity, insurers can target their efforts toward improving overall cost trends in workers' compensation," he said. "This can help them avoid the potential soft market price squeeze that can rapidly reverse recent gains and allow insurers to maintain profitability."
Severity factors such as the aging, work force and increases in claims from riskier sectors such as construction seem to be on the rise, which Mr. Jablonski noted, could threaten profits in years to come if the market softening continues.
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