Workers’ compensation insurers have generated solid profits in recent years but face an uncertain future, credit rating agency AM Best said in a market segment report released Tuesday.
Annual underwriting profits in the comp industry averaged $4.8 billion over the past five years, “a level of profitability unmatched by any of the other major property/casualty industries,” AM Best said.
The net loss ratio has varied from 45.4% to 49% over the past five years, reflecting the benefits of improved workplace safety as well as legislative changes that have limited claims costs. The total cost percentage during the same period was between 86.2% and 92.2% and was 87.9% in 2021.
AM Best also cited a strong favorable trend in loss reserves and low unemployment figures that point to a continued increase in compensation premiums through the end of 2022. However, that forecast will depend on other economic factors.
“Inflation can disrupt this stable environment. If inflation causes loss costs to increase, particularly on the medical side, without a corresponding increase in employee wages, rate hikes may be necessary to cover the gap,” said Christopher Graham, senior industry analyst for AM Best , in a statement. “Inflation may also require companies to further tighten their risk management and loss control efforts to limit claim rates.”
AM Best also said that while net income for insurers is strong, it has not grown at the same rate as policyholder surplus. This resulted in a reduction in return on equity after tax over the past two years.
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