NU Online News Service, Oct. 4, 12:46 p.m. EDT
Reports from the National Council on Compensation Insurance showing that workers' comp claim frequency in 2010 increased for the first time since 1997 is credit-negative for property and casualty insurers, says Moody's, but it's too early to know if the increase is a cyclical tendency or reversal of the long-term trend.
In its Weekly Credit Outlook, Moody's says its rated companies are diversified across many lines of business, but for some companies "workers' compensation represents a sizeable percentage [greater than 10 percent] of their total premium revenue and they will therefore be more affected than others by the rise in frequency."
But the rating agency notes that there are sizeable percentages of large-deductible policies, which mitigates the impact.
Moody's says, "The historical decline in claim frequency typically benefited insurers' profitability by partially offsetting steady increases in claim severity."
The rating agency says profitability in workers' compensation has already been under "considerable pressure" for the past few years as medical costs continue to rise and high unemployment and declining payrolls have cut into premium generated for insurers. Additionally, Moody's points out that workers' comp is a long-tail line of business and relies on investment income as claims pay out over an average of five years.
"These factors led to deterioration in both underwriting and overall net profit margins," Moody's says.
Accident year combined ratios for workers' comp have been steadily growing, from 98 in 2007 to 114 in 2010, and companies have reported adverse development in the most recent accident years as well as in accident years prior to 2003, says Moody's.
"We expect this will continue in the near term," Moody's says. "According to our loss-reserve analysis, workers' compensation reserves as of year-end 2010 are moderately deficient, with most of the deficiency attributable to the 2008-10 accident years, offset by redundancies in earlier years."
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