Workers comp pricing – where’s it headed?

After my post yesterday, I received a couple of ‘what are you smoking’ messages from industry colleagues reacting to my note on firming pricing for work comp premiums. (in fairness, I was reporting on a MarketScout study…)
Well, here are a couple other news items that may indicate where pricing is heading.
From Fitch Ratings (via PropertyCasualty360) comes this rather alarming item:
“Workers’ compensation saw the most severe underwriting losses, the report notes, with a combined ratio of 113.3. [emphasis added] “While the workers’ compensation line benefited from reform efforts in various states and continued declines in claims frequency, claims severity in this segment has steadily trended upward,” Fitch notes. The rating agency adds that revenue was hurt by exposure declines as employment levels and payrolls fell during the recession.”
Now that employment and business activity is picking up, I expect we’ll see a bump in frequency as well – not a structural change, but a reaction to faster pace of work, more temps working in unfamiliar jobs, more overtime. This, combined with the tough employment market for the long-term unemployed (can’t go back to work if there aren’t any jobs you are trained for) will likely result in a double whammy – more claims, and more severe claims.
Add to this the recent heavy losses due to catastrophes abroad (Japan) and at home (flooding, tornados) and the financial implications thereof, and it looks like work comp carriers and self insured employers are going to be paying more for reinsurance and stop loss coverage.
In ‘normal’ times a combined ratio of 113 would be tough enough, but with interest rates at near-historic lows and an uncertain investment environment, work comp insurers – and reinsurers – will be hard-pressed to make up the losses with investment income.
What does this mean for you?
A hardening – but not yet hard – market looks increasingly likely this year.