With wage inflation and medical inflation, comp profits could dip: Fitch

Fitch Ratings, in a report issued Thursday, anticipates worker compensation profits to dip due to “generally” declining rates in recent years, a reduction in reserve development, and the “potential for rising claims costs from medical inflation.”

Calling it “the strongest-performing” major commercial product line for the U.S. property and casualty market for “an extended period,” Fitch cited its 10 consecutive years of underwriting profits and an average combined ratio of 90% from 2015 to 2024, with that percentage dipping to 89% in the latest figures.

The agency, however, anticipates combined ratios to rise to the mid-90s in the coming years.

“The extended period of strong underwriting profits will inevitably end, as the workers compensation market remains highly competitive and cyclical,” the report states, citing the Council of Insurance Agents & Brokers Commercial Lines Market Survey that has tracked modestly declining prices for workers compensation coverage for 36 of the last 42 quarters, including the last 14, capped by a 1.8% decline in the second quarter of this year.

“The direction of pricing is anticipated to remain moderately negative through 2026. This decline in rates exceeded the pace of payroll growth, resulting in a decline in net written premiums in 2024,” the report states.

Fitch also said that increasing claim severity is an area of concern. “A key offset to declining premium rates is a long-term trend of declining claims frequency, which is a testament to insurers’ collaboration with policyholders to improve risk management and workplace safety. However, claim severity has moved higher in the last three years, as an increase in medical cost severity is largely driven by higher utilization, and indemnity severity has been tied to wage inflation in recent years.”