Premium, interest rate trends challenge workers compensation

The workers compensation line is still a strong performer, although negative premium rate trends and the low interest rate environment are putting pressure on the line, experts say. 

“I thought (the workers comp line) would be deteriorating a bit sooner given pricing trends,” said James Auden, Chicago-based managing director of insurance at Fitch Ratings Inc. 

Among property/casualty lines, workers compensation is the only major segment that has not seen big rate increases in recent years, he noted. However, he said that given the long run of strong results, the line is likely to begin to turn soon. 

“The trends on pricing point to deterioration going forward,” he said. 

But the “loss reserve strength of the insurance carriers” is in the line’s favor, Mr. Auden said. “Workers comp has had very good reserve experience in the last two to three years, and I still think there’s redundancy in reserves.”

But the degree to which “reserving practices will change for 2020 is unclear,” said Robert Hartwig, clinical associate professor and director of the Risk and Uncertainty Management Center at the University of South Carolina in Columbia. “It’s possible that companies will be more cautious about releasing reserves given the uncertainty. That alone could have a material impact in driving up the combined ratio.”

The low interest rate environment is another concern. “There could be riskier assets coming into the fold as insurers are looking for that same rate,” said Dan Mangano, Oldwick, New Jersey-based financial analyst with A.M. Best Co.