Workers’ Compensation Turn a Profit? Fahgettaboudit!

Workers’ compensation carriers with visions of profits over the next few years are dreaming.

It ain’t goin’ to happen, according to insurance analysts at Standard & Poors Ratings Services.

“All signs are pointing to more unprofitable years ahead for the workers’ compensation insurance industry,” the firm said in its report titled “For The U.S. Property/Casualty Industry, Making Workers’ Compensation Profitable May Be Mission Impossible.”

Why the negativity?

S&P blames continued high unemployment, a sluggish economic recovery, potential for higher inflation on future claims payments, adverse reserve developments, and a volatile investment environment with historic low investment yields.

What’s more, the workers’ compensation industry hasn’t been great at making a profit in the recent past.

All of that could add up to many years of unprofitability for the workers’ compensation industry.

S&P said that this industry has a “dismal track record” of underwriting results as illustrated by only three years of underwriting profits over the past two decades (1991-2010). Between 1991 and 2010, the industry statutory combined ratio was below 100 percent in 1995, 1996, and 2006.

A combined ratio of more than 100 percent signifies an underwriting loss. Although many property/casualty (P/C) insurers, especially those writing workers’ compensation, rely on investment incomes to offset underwriting losses, current historically low investment yields could also hinder such dependence going forward.

In light of these factors, Standard & Poor’s Ratings Services said it remains bearish on this line. Despite pockets of rate increases in a few states, S&P said it believes the negative factors point to years of unprofitability in this line.

S&P also said it believes many P/C insurers with meaningful concentration in workers’ compensation will continue to report underwriting losses in this line over the next few years, primarily arising from recent accident years (2007-2010).

Workers’ compensation pricing showed a modestly improving trend in the latter part of last year. If it persists, it could potentially lead to industrywide rate improvements for many casualty lines. However, S&P said it is unsure whether the current pace of rate increases in workers’ compensation will be sustainable over the next few years, and, if so, whether it will be sufficient to overcome increased loss costs.

The workers’ compensation industry’s reserves will remain inadequate over the next few years, in S&P’s view. Its analysts expect many insurers with meaningful concentration in workers’ compensation to strengthen their prior year reserves, especially for accident years 2007-2010.

S&P, which monitors quarterly reserve developments for all P/C insurers, said that if certain P/C insurers substantially strengthen their reserves, especially for recent accident years, such that their operating earnings fall materially below expectations, its analysts would consider lowering some ratings.