After a decade of extended profitability, the U.S. workers’ compensation insurance market faces emerging challenges for insurers and reinsurers, according to a Swiss Re analysis.

“This market has been a bright spot in an often tough environment for casualty re/insurers, with the National Council on Compensation Insurance (NCCI) recently highlighting continued strong performance in 2023 that saw a 10th-consecutive calendar year of underwriting profitability for private carriers,” wrote Laure Forgeron, chief underwriting officer-casualty of Swiss Re, in a blog post analyzing the sector.

Workplace safety improvements have reduced accidents, while better claims handling, including the use of managed care networks and programs to assist injured workers in returning to their jobs more swiftly, has contributed to positive developments, Swiss Re noted.

Reserve releases have also supported results during this period, with calendar year combined ratios remaining below 100% since 2015 and averaging less than 90% over the most recent six-year period, according to the analysis. The COVID-19 pandemic further contributed to lower claim frequency due to social-distancing measures and the adoption of work-from-home policies, the report noted.

Historically, the U.S. workers’ compensation market has exhibited strong cycles driven by the macroeconomic environment and regulation, Swiss Re stated. Reforms in the 1990s helped improve loss ratios, but by the end of the decade, they had climbed dramatically amid a softening market and overcapacity. The market hardened again after the 9/11 terrorist attack, which had a substantial direct impact on workers’ compensation claims in New York and nearby states.

Emerging Challenges and Headwinds

“While the WC market continues to exhibit some favorable characteristics, our analysis from the perspective of a reinsurer that is engaged in this market indicates the need for a heightened level of diligence,” Forgeron writes. “A variety of potential headwinds and risks have surfaced, or in some instances, re-surfaced, meriting caution and scrutiny by re/insurers as they work to protect and reinforce the performance of their portfolios.”

One key risk is continued downward pressure on premium rates due to fierce competition and new players entering the market. Workers’ compensation insurance rates have decreased for 10 consecutive years, Swiss Re noted. This has pushed accident year combined ratios above the 100% threshold, although this deterioration has been masked by favorable reserve releases that are keeping calendar year results positive, according to the reinsurer.

Medical inflation is also projected to increase significantly in the near future compared to the low-inflation pre-pandemic years. In addition, wages in the health care sector are expected to rise amid a shortage of workers, which will drive up costs. While medical fee schedules help contain this, severities are still anticipated to increase substantially, eroding the net benefit insurers have seen from workforce payroll outpacing medical severity, Swiss Re stated.

The current tight labor market with low unemployment presents another risk. As employers struggle to find workers, they may hire less skilled or experienced employees, particularly in industries like construction and service.

Studies have shown that workers in their first year on the job are more than twice as likely to have a claim compared to the state-wide average, according to Swiss Re. At the same time, the workplace safety improvements that have helped reduce accident frequency in recent years appear to be plateauing.

Market dynamics also vary considerably across states, with some of the largest markets exhibiting the most challenged loss ratios, Swiss Re said. California, New York and New Jersey in particular are facing significant pressure on premiums due to intense competition among insurers. In California, the average charged premium rate has plummeted by 50% from 2015 to 2023. Insurers will need to take a cautious and disciplined approach, especially in these states, to ensure pricing and risk are appropriately matched, the reinsurer advised.

Market Outlook and Recommendations

Improved data and analytics in underwriting and claims have enhanced risk assessment, but there are signs of continued deterioration of underlying accident year combined ratios due to various factors, Swiss Re said.

The current soft market is expected to continue, but margins will decrease in the near-term.

To keep pace with emerging risks, Swiss Re cautions that premiums must be sustainable, particularly in states that have seen fierce competition and the biggest rate declines. However, the reforms implemented in the workers’ compensation insurance market over the past three decades make a return to past cyclicality less likely, the reinsurer said.

Read the full analysis on Swiss Re’s website. &

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