2019: Workers' Compensation Insurance - As Good as it Gets
Workers’ compensation loss frequency has decreased by 29% from 2010 to 2017, and calendar-year workers’ compensation insurance results in 2015-2018 are poised to be their most profitable in a half-century. This study identifies and analyzes factors that have converged in recent years, each providing tailwinds to the industry, and many of which may reverse in coming years. The study looks beyond the cycle to analyze external structural forces driving long-lasting change to workers’ compensation insurance. These factors include growing labor shortages in key economic sectors, new immigration patterns, an aging and less healthy workforce, growth in “gig” work, and cutbacks in safety and job training at many employers, among others. The study also examines the longer-term future of work and the work-related implications of technology-driven labor displacement from robotics, AI, and autonomous vehicles.
1. Introduction
2. Executive Summary
3. Industry Performance
- Underwriting and Operating Results
- Where Are We in the Cycle?
- Premium Growth Trends
- Losses
- Loss Reserves
- Summary
4. Reasons for Today’s Outperformance
- Workplace Demographics and Worker Environment
- Forces Pressuring Loss Costs
- Other Market and External Forces
- Summary
5. Alarm Bells
- Crisis Coming?
- Changing Worker/Workplace Characteristics
- Loss Severity Drivers
- Public Policy Impact
- Cost-Shifting
- New Risks
- Summary
6. The Future of Work and Workers’ Compensation
- The Future of Work
- Workers’ Compensation Critiques and Challenges
- Opt-Out and Alternatives to Workers’ Compensation
- Summary
Appendix
A. Fatalities
B. Labor Force Forecasts
Introduction
Calendar-year workers’ compensation insurance results in 2015-2018 are poised to be their most profitable in a half-century. In 2015-2017, the combined ratio averaged 94.4%. In 2017, the combined ratio was a record low 92.3%, and underwriting results in 2018 are likely to be even more profitable. Loss frequency decreased by 29% from 2010 to 2017.
Why have workers’ compensation results been so favorable, and why has loss frequency decreased so dramatically? The conventional wisdom is that improvements in workplace safety are largely responsible. This study challenges that notion and identifies nine additional factors that converged in recent years, each providing tailwinds to the industry. The collective impact of the ten factors was so strong that it drove the combined ratio down to uncharted territory. Most of these tailwinds are subject to reversal and may turn into headwinds with the passage of time because they are part and parcel of the insurance market cycle. As the cycle advances, these same drivers that today underpin the industry’s favorable results will lead us to the cycle’s next phases, where profits once again yield to losses.
Our study looks beyond the cycle to analyze external structural forces driving long-lasting change to workers’ compensation insurance. External factors expected to affect the industry in the medium term arise from unfolding economic, technological, and societal trends that will fundamentally alter workplaces, transform the workforce, and change loss potential. These factors include growing labor shortages in key economic sectors, new immigration patterns, an aging and less healthy workforce, growth in “gig” work, and cutbacks in safety and job training at many employers. Other factors include rising medical costs for treatment of severe accidents and higher catastrophic claim survivability. The study also examines the longer-term future of work and the work-related implications of technology-driven labor displacement from robotics, AI, and autonomous vehicles.
Workers’ compensation insurance is a complex business line. Its results are shaped by myriad forces. Beyond the basics of exposure factors and pricing, workers’ compensation insurance results are influenced by medical advances, developments at state-level workers’ compensation bureaus, and legal trends. The external structural trends presented in this study introduce an additional layer of factors that will shape the future of workers’ compensation. It is mission-critical for insurers to understand how these trends will change workers’ compensation in order to respond appropriately and maximize chances for outperformance amid future market conditions.