Reduced Payroll Lowers Premiums

The U.S. workers' compensation insurance market experienced an underwriting loss in 2008. The softening of premium rates along with an increase in overall loss cost contributed to this decline in underwriting performance.

Payrolls are decreasing more rapidly than insurers projected. Along with unemployment, the industry is facing also reduced working hours, no replacement of natural attrition and wage reductions.

According to the unemployment data released by the Bureau of Labor Statistics (BLS) early July, 467,000 jobs were reduced by employers in June and the unemployment rate reached a high of 9.5%. A widespread job bust that spanned major industry sectors saw 14.7 million unemployed in June.

7.2 million people have become jobless since the recession began in December 2007. Also, the number of job openings has declined by 1.5 million, or 36% year-over-year as of May 2009. With the deepening economic uncertainty, companies are aggressively focusing on cost control which is mostly driven by retrenchment.

The steady rise in medical costs that continues to outpace wages is another problem for the workers compensation insurance industry. While indemnity claim costs have surpassed wage increases, low investment yields are pressuring industry underwriting results. This, coupled with low interest rates, is continuing to challenge pricing in the market.

Among the worst affected are ACE Ltd. (ACE - Analyst Report), Zenith National Insurance Corp. (ZNT - Snapshot Report), Employers Holdings Inc. (EIG - Snapshot Report) and SeaBright Insurance Holdings Inc. (SBX - Snapshot Report).

Until the economy recovers, payrolls will remain curtailed. As premium production is directly correlated with payroll, any dramatic improvement in the industry’s topline is unlikely.