We are pleased to summarize key year-end 2021 financial results for U.S. workers’ compensation writers based on data available from S&P Global Market Intelligence software. Milliman’s cohort of workers’ compensation writers includes 40 companies or groups of companies, each with 2021 workers’ compensation direct written premium of more than $290 million. This selected cohort represents approximately 76% of the total industry workers’ compensation direct written premium volume for 2021. The metrics we reviewed show a significant increase in policyholders’ surplus, a slight rebound to direct written premium after two years of decreases, and an increase to calendar year loss and defense and cost containment expenses (DCCE) ratios relative to year-end 2020.
As displayed in the following figures and commentary, recent experience for workers’ compensation has been favorable. However, the social and economic environment has changed, partially due to COVID-19, and these changes could have a material impact on future workers’ compensation premium and losses. Some of these specific changes include higher wage inflation, more employees changing jobs, continued low unemployment rates resulting in inexperienced workers in certain segments of employment, increased usage of “work from home” environments versus return to the office, uncertainty with medical inflation driven by overall inflation, and supply chain shortages. Because workers’ compensation is a long-tail line of business, the current environment could substantially impact prior year losses. Therefore, workers’ compensation experience will need to be continually monitored.
The following sections contain detailed information related to premium, loss ratios, reserve development, and surplus for the selected cohort.
COVID-19
There is substantial uncertainty regarding the impact of COVID-19 on the workers’ compensation market. The pandemic may continue, for example, to affect the availability and timeliness of medical treatment, which may affect the length of the recovery period, the ultimate cost of treatment, and the timing of payments for workplace and other injuries. In addition, the presence of COVID-19 may influence claim filing and claim settlement behavior in unexpected ways. The statutory results presented herein are evaluated as of December 31, 2021; in particular, accident years 2020 and 2021 may be impacted by COVID-19 claims as well as the slowdown in the economy due to the pandemic.
Direct written premium (DWP)
After three consecutive years of flat or negative DWP growth, the cohort experienced a 1.6% increase in workers’ compensation DWP during 2021. The small increase can be primarily attributed to a bounce back in exposure (i.e., payroll) after the 2020 year, which was greatly impacted by the COVID-19 pandemic. Despite the moderate increase in DWP over 2020, the $38.6 billion of actual DWP is lower than any of the past five years (other than 2020 when the pandemic started). As other lines of business have begun to see the impacts of rate increases within a firming market, workers’ compensation writers continue to see neutral or decreasing rate action driven by ongoing favorable frequency trends. The graph in Figure 1 displays the total workers’ compensation DWP for the cohort, along with the percentage change from the prior year.
Figure 1: Top 40 workers’ compensation groups: direct written workers’ compensation premiums ($ billions)
Loss ratios
The countrywide workers’ compensation 2021 calendar year loss and DCCE ratio (CYLR) for the industry was approximately 55%. The graph in Figure 2 shows the countrywide CYLRs as well as the CYLRs for several of the largest states for each of the last five years. CYLRs are not only impacted by the current accident year, but also by changes in the estimates of ultimate losses in prior years (i.e., reserve additions or releases for prior accident years). As shown in subsequent figures, the accident year 2021 ultimate loss ratio is lower than the initial estimate for accident year 2020. However, the prior year reserve development in 2021 was less favorable than in 2020, causing the 2021 CYLR to be slightly higher than the 2020 CYLR. The slight increase in the countrywide 2021 CYLR over 2020 was primarily due to the nearly eight-percentage-point increase in CYLR in both California and Pennsylvania. Of the 15 largest states based on 2021 direct earned premium, only five states experienced an increase in CYLR relative to 2020 (California, Massachusetts, Michigan, Pennsylvania, and Virginia).
Figure 2: Workers’ compensation: calendar year direct loss and DCCE ratio, total industry
As displayed in the graph in Figure 3, the workers’ compensation accident year loss ratios for the cohort continue to improve from the initial booked estimates, as each calendar year shows improvement from the prior booked estimates. The initial estimate for the 2020 accident year of 75.4% was approximately 3% points higher than the initial estimate of 72.3% for each of the prior three accident years. This may have been impacted by uncertainty associated with COVID-19-related claims, as well as the uncertainty related to the potential slowdown in payments, treatments, and changes to settlement values. Like prior accident years, the 2020 accident year loss ratio developed favorably during 2021. The initial estimate for the 2021 accident year is approximately 1% lower than the initial estimate for accident year 2020, but still higher than the initial loss ratios for accident years 2017 through 2020. Given the recent rate decreases seen countrywide, one might expect a higher initial loss ratio. Despite the rate changes, accident year 2021 may display the same pattern of favorable development as prior accident years have.
Figure 3: Top 40 workers’ compensation groups: calendar year development by accident year, net ultimate loss and LAE ratio – workers’ compensation
Reserve development
The graph in Figure 4 compares the cohort’s one-year reserve development to net earned premium for all lines of business to that of workers’ compensation only. The cohort’s development for all lines of business has shown slightly favorable reserve development for each of the last five years, while workers’ compensation development displays double-digit favorable reserve development for each of the last five years. The workers’ compensation favorable reserve development continues to significantly outpace the reserve development for other lines of business as insurers continue to release redundancies. Workers’ compensation is a long-tail line of business with considerable uncertainty in future trends, especially medical inflation, changes in medical care, and life expectancies. Recent favorable trends have allowed insurers to reduce their estimates of ultimate losses.
Figure 4: Top 40 workers’ compensation groups: one-year reserve development
Policyholders’ surplus (PHS)
PHS for the cohort increased by 18.5% in 2021. The large increases in PHS for 2019 and 2021 are primarily driven by National Indemnity Company. Excluding National Indemnity Company, the 2019 increase in PHS was a more modest 5.4%, while the 2021 increase in PHS was 9.3%. Despite the significant impact that National Indemnity Company had on the change in PHS during 2021, there were several other companies in the cohort that also experienced significant increases in PHS. In fact, nearly half of the companies in the cohort experienced double-digit increases to PHS, while only three companies in the cohort saw their PHS decrease during 2021. It should be noted that PHS is affected by many different factors, including underwriting results, investment income, distribution of exposures, etc. Many of the companies included in this cohort write multiple lines of business, therefore it should not be inferred that the total increase in PHS for the cohort is a direct result of workers’ compensation experience. The graph in Figure 5 displays the total PHS for the cohort, along with the percentage change from the prior year.
