Workers’ Compensation Insurance Profitable in 2012

Private workers’ compensation insurers earned $6.20 of profits for every $100 of net premiums.

This is according to the article, Workers’ Compensation Insurance Industry Underwriting Results Improve in 2012, which was released yesterday.

Nationally, the industry’s operating ratio was 93.8 in 2012, down from 100.4 in 2011, according to author John F. Burton, Jr. who has been a comp observer for 50 years.

Conversely, an operating ratio of greater than 100 means the industry is not profitable, which means that carriers had losses of $0.40 for every $100 of net premium in 2011, according to Burton, who bases his conclusions on A.M. Best figures. (For more information about last year’s report, click here.)

These observations are made in his article, Workers’ Compensation Insurance Industry Underwriting Results Improve in 2012, which was published yesterday in the Workers’ Compensation Resources Research Report, Issue 7.

Losses, such as those that occurred in 2011, rarely happen. The operating ratio has usually been less than 100 in recent decades, Burton said, which shows that the workers’ compensation insurance industry has generally been profitable when investment income earned by insurance carriers is included. Since 1993, the insurance industry has been profitable in 16 of the 19 years – all but 2001, 2002, and 2011.

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But the profitability discussion raises the perennial philosophical question of how much should insurers profit from…America’s oldest form of social insurance?
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Typically, workers’ compensation junkies pay close attention to National Council on Compensation Insurance (NCCI)’s annual State of the Line Report because the NCCI’s data are based on combined ratio data from most states in the United States. The NCCI puts more emphasis on the combined ratio because it indicates workers’ compensation costs (benefits plus expenses) per $1 collected in premium.

As I covered recently in Leader’s Edge, large insurers are investing more in reinsurance than the traditional bond market, which is offering very low returns due to low interest rates. (To see my article, click here.) Other investors have joined the party and the world’s reinsurance surplus is now the largest in history.

Sometimes in CompLand we complain about not having enough data, but there is more workers’ compensation data available than other property-casualty lines.

Burton is right that we should pay attention to the operating ratio as opposed to focusing on the combined ratio to get a fuller picture of workers’ compensation profitability.

But the profitability discussion raises the perennial philosophical question of how much should insurers profit from workers’ compensation, which is America’s oldest form of social insurance? I see the pros and cons of state-sponsored workers’ compensation funds compared to private workers’ compensation insurers and conclude that both approaches have pros and cons. The same is true for the ObamaCare debates concerning government-sponsored compared to private health insurance.

I am glad that John continues to look at issues in workers’ compensation that rarely make headlines. I hope that all of us who care about our nation’s workers’ compensation system will pay more attention to what John has to say. He is not quoted enough.

An order form for Issue 7 of the Burton’s report can be downloaded from www.workerscompresources.com.