Despite the economic challenges from the coronavirus pandemic, the workers' compensation insurance market is likely to report strong profitability in 2020 thanks to savings from lower claims frequency due that are currently outpacing pandemic-related losses, according to Fitch Ratings.
However, Fitch analysts warn, underwriting performance in 2021 and beyond will likely deteriorate, as claims activity normalizes with increased business activity and premium revenue continues to fall amid recent underwriting exposure reductions and competitive pricing forces.
According to Fitch, workers' compensation insurance has been the most consistently profitable segment in U.S. commercial lines over the last five years, with a 91% average combined ratio from 2015-2019. Loss reserves have also exhibited unusual strength with favorable prior-year development of 15% of calendar year earned premium in both 2018 and 2019.
While events remain highly fluid, year-to-date overall workers' compensation results remain favorable. The direct loss ratio of 50% remained unchanged in the first half of this year versus the prior year first half.
Reports indicate that claims frequency is down significantly, tied likely to the slowdown in economic activity, with sharp reductions in employee time spent at the workspace. The California Workers' Compensation Insurance Rating Bureau (WCIRB) reported second quarter claims frequency compared to the prior-year quarter was down by 10% for indemnity claims and 33% for medical only claims.
Pandemic-related long term or catastrophic claims have also been limited to date. However, uncertainty remains regarding longer term health implications for more severe virus cases, including the potential for major organ damage and other chronic conditions that would ultimately increase workers' compensation costs.
Pandemic-related cases represent 7.4% of year-to-date paid claims, 99% of which settled for payments of less than $10,000, according to the Florida Division of Workers' Compensation's recent 2020 COVID-19 Report.
Due to prior profitability, workers' compensation is the only major commercial lines segment not experiencing significant premium rate increases. Segment direct written premiums in the first half of this year fell by 9% versus the prior-year period. "These volume declines are likely to continue in the near term, with underwriting exposure reductions, reduced employer payrolls and effects from negative premium audits," the report says.
Negative premium rate pressure may briefly pause amid current economic uncertainty but not meaningfully subside over the next few years. Future premium volume will also hinge on the pace of the economic recovery, with recognition that improvement in employment and wages will be uneven across sectors.
Fitch says the strength of the economic recovery will also influence claims frequency levels going forward. However, some of the broad socio-economic shifts in response to the pandemic may have a longer-term effect on workers' compensation risk exposures and claims costs, Fitch adds. Also, Fitch analysts say greater use of telemedicine, more prevalent work from home arrangements and reduced employee travel will affect claims trends.