Magazine article Risk Management

1999 Worker's Compensation Pricing: An Increase on the Way?

Magazine article Risk Management

1999 Worker's Compensation Pricing: An Increase on the Way?

Article excerpt

Workers' compensation prices are very near the bottom of a pricing cycle and are expected to firm and begin to increase during 1999. Competitive pricing for workers' comp eroded premiums over the last six years as real improvements in underwriting results after 1991 justified price decreases. However, underwriting results have been deteriorating since 1994. This fact has been masked in financial statements by the accounting for changes made to reserves. This piece examines the loss reserving and accounting issues that changed sharply in 1998 and will bring about pressure for underwriting price increases for workers' comp this year.

A quick historical perspective is gained from an examination of Schedule P and calendar year annual statement data. Workers' comp was unprofitable for the industry in 1988, 1989 and 1990 on any basis of measurement. The combined operating ratio was approximately 118 percent for each calendar year. The developed accident year combined ratios for those three years were at the same 117 percent to 119 percent level as of year-end 1997. With approximately 13 percent investment income in each year, the result was a loss of 4 percent to 5 percent of earned premium each year after investment income. Prices were continuing to rise during this peri- od through 1991 into 1992. this led to action addressing the rampant fraud in the system and to introduction of stronger medical cost-containment programs. As workers' comp laws in a number of states were revised, results began to improve. Loss control, claim management and legislative efforts have led to significantly improved results since 1992, and the pricing of workers' comp insurance has become increasingly competitive.

Where is workers' comp pricing headed next? The examination and analysis of certain key data supports our belief that a shift in the marketplace pricing of workers' comp is imminent.

Gaining an understanding of probable future pricing requires a review of the history of workers' comp incurred losses, insurance industry financial results, accident year underwriting results and loss plus expense combined ratios. The loss development and combined ratio numbers show a pattern that portends the end of the recent heavy price competition and the probable beginning of price increases. Based on this underlying data and historical pricing observations, we believe that pricing increases for this important line of insurance should be expected this year.

History of Incurred Losses

Schedule P-part 2D for workers' comp provides the loss data basis for this analysis. Incurred losses and allocated loss adjustment expenses (ALAE) reported on annual statements of the insurance companies were compiled in a summary exhibit contained in the 1998 Best's Aggregates and Averages, PropertyCasualty edition. Exhibit 1 is from the summary prepared by Best's, providing a history of incurred losses by year in which the losses were incurred, commonly referred to as "accident year." The columns provide loss and allocated expense amounts at the end of each calendar year 1990 through 1997. The amounts shown are established by the insurance companies as of year-end evaluations to pay estimated ultimate losses and ALAE, including incurred but not reported losses.

The first important observation to make from Exhibit 1 is that there has been upward development occurring from 1990 through 1997 for accident years 1990 and prior. Moving from the incurred cost initially established by the industry in the calendar year in which the claims occurred, to the right to the 1997 column incurred cost indicates the development for the accident year. For 1991 and subsequent accident years, there is a pattern of downward development for each accident year.

A second major observation is that the initial incurred amount established for each accident year has been less each year since $27.6 billion was established for 1991 at its year-end. …

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