Workers’ compensation financial results

We are pleased to summarize key year-end 2022 financial results for U.S. workers’ compensation writers based on data available from S&P Global Market Intelligence software. Milliman’s composite of workers’ compensation writers includes 40 companies or groups of companies, each with 2022 workers’ compensation direct written premium of more than $340 million. This selected composite represents nearly 80% of the total workers’ compensation direct written premium volume for 2022. The metrics we reviewed show a double-digit increase to direct written premium after years of flat growth, an improvement in the calendar year loss and defense and cost containment expense (DCCE) ratios relative to year-end 2021, the continued favorable development of prior accident years’ loss ratios, and a decrease in policyholders’ surplus that was experienced by much of the insurance industry.

As displayed in the following tables and commentary, recent experience for workers’ compensation has been favorable. However, the social and economic environment has changed, 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,” and uncertainty with medical inflation. 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 pages contain detailed information related to premium, loss ratios, reserve development, and surplus for the selected composite. It should also be noted that the historical data for this composite of insurers has been aggregated to reflect any acquisitions during 2022, such that the historical data is on a similar basis as current data.

Largest direct written premium (DWP) growth in last five years

After three consecutive years of fairly flat or negative DWP growth, this composite experienced a 10.3% increase in workers’ compensation DWP during 2022. The lower DWP volumes in 2020 and 2021 can be primarily attributed to lower employment during the height of the pandemic. The premium for 2022 has returned to pre-pandemic levels. The increase in premium during 2022 is due to increased employment as the economy and U.S. workforce continued to recover from the pandemic, as well as increased wages due to inflation. Offsetting this increase in employment and wages is lower rates per payroll, primarily due to the decreased frequency of claims. Other lines of business have seen the impacts of rate increases; however, workers’ compensation writers continue to see neutral or decreasing rate action driven by ongoing favorable frequency trends and wage trends offsetting medical and indemnity severity trends. Figure 1 displays the total workers’ compensation DWP for this composite, along with the percentage change from the prior year.

Loss ratios improve over 2021

The countrywide workers’ compensation 2022 calendar year loss and DCCE ratio (CYLR) for the industry was roughly 52%, which represents an improvement of roughly 340 basis points compared to 2021. The improvement in CYLR during 2022 was driven by an improvement to accident year loss (as opposed to DCCE), as well as favorable development on older accident years. Figure 2 shows the workers’ compensation CYLRs for each of the last five years on a countrywide basis and for several of the largest states. The decrease in 2022 was widespread across several jurisdictions, as more than 30 states experienced an improvement in the CYLR for 2022 compared to 2021.

As displayed in Figure 3, the workers’ compensation accident year net ultimate loss and loss adjustment expense (LAE) ratios for this composite have developed favorably from the initial booked estimates for each of the prior four accident years. The initial estimate for accident year 2022 is 71.1%, which is the lowest initial estimate for an accident year net ultimate loss and LAE ratio since at least 2018. This is over 400 basis points lower than the initial estimates for the pandemic-influenced accident years 2020 and 2021. It is likely that the initial estimates for accident years 2020 and 2021 were impacted by uncertainty associated with the pandemic, including potential slowdown in payments, treatments, and changes in the economy.

Reserve development continues to outpace industry

Figure 4 compares this composite’s ratio of one-year reserve development to net earned premium for all lines of business to that of workers’ compensation only. This composite’s development for all lines of business has shown slightly favorable one-year reserve development for each of the last five years, while workers’ compensation has displayed double-digit favorable one-year 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 release redundancies. Recent favorable trends have allowed insurers to reduce their estimates of ultimate losses. However, this favorable development (as a percentage of net earned premium) has shrunk each of the last three years. 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, where changes to any or all of these factors could influence future reserve development.

Policyholders’ surplus (PHS) decreases

PHS for this composite decreased by 5.6% in 2022, the first decrease to PHS in at least five years. The large increases in PHS for 2019 and 2021 are primarily driven by Berkshire Hathaway. Excluding Berkshire Hathaway, the 2019 increase in PHS for this composite was a more modest 5.0%, while the 2021 increase in PHS was 9.2%. The decrease in PHS during 2022 for this composite was not unique to the workers’ compensation industry and is representative of the experience of the broader insurance industry, which displayed an estimated 6.5% decrease in PHS in 2022. It is likely that the decrease in PHS was impacted by macroeconomic factors, such as rising inflation, that led to prominent levels of unrealized capital losses for the entire industry. Many of the companies included in this composite write multiple lines of business, so underwriting losses on other lines of business impact the overall PHS levels. It is likely that the favorable calendar year results of the workers’ compensation business help mitigate the decrease in PHS for this composite. Figure 5 displays the total PHS for this composite, along with the percentage change from the prior year.