Job Losses Hurting Workers’ Comp

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 costs have 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) in early September, 466,000 jobs were reduced by employers in August and the unemployment rate rose by 0.3 percentage point to 9.7%. A widespread job bust that spanned major industry sectors saw 14.9 million unemployed in August.

About 7.4 million people have become jobless since the recession began in December 2007, while the unemployment rate has grown by 4.8 percentage points. Although job losses continued in many of the major industry sectors in August, the declines have moderated in recent months. The rate had been little changed in June and July, after increasing 0.4 or 0.5 percentage points in each month from December 2008 through May.

Though the early signs of an economic rebound inspire our confidence we note that the companies are aggressively focusing on expense management and are implementing stringent methods to curb costs which are mostly driven by retrenchment.

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

Additionally, 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).