At its
Annual Insights Symposium (AIS) in May 2022, NCCI presented the
State of the Line Report—a comprehensive account of financial results for the workers compensation (WC) line of business. The results presented in that report reflected the most current data available at the time, including NCCI’s preliminary estimates for Calendar Year 2021. In this report, NCCI provides updated results for 2021, as well as preliminary information for 2022.
Key Takeaways
The final countrywide analysis shows:
- WC Calendar Year 2021 private carrier net written premium (NWP) increased from 2020 by 0.5% to $38.2 billion
- The WC Calendar Year 2021 private carrier combined ratio was 87.2%, and the operating gain was 23.7%
While still early and subject to revision, preliminary analysis through the second quarter of 2022 shows that:
- WC Calendar Year 2022 private carrier direct written premium (DWP) increased nearly 10% through the first two quarters of 2022, compared with DWP through the first two quarters of 2021
- The WC Calendar Year 2022 private carrier direct loss ratio through the first two quarters of 2022 is lower than that observed through the first two quarters of 2021
WC Net Written Premium
For Calendar Year 2021, NCCI previously estimated WC written premium volume net of reinsurance (NWP) to be $38.3 billion for private carriers. The most recently reported industry data for that year is $38.2 billion, which represents a 0.5% increase from 2020’s NWP volume of $38.0 billion.
WC Financial Results
For Calendar Year 2021, NCCI previously estimated a WC net combined ratio of 87% for private carriers. Updated industry data indicates a net combined ratio of 87.2%, which represents a 12.8% underwriting gain.
The 2021 combined ratio is the fourth lowest combined ratio in recent history and the eighth consecutive underwriting gain for the WC industry. The current period of consecutive underwriting gains is unprecedented in terms of both duration and magnitude.
The WC investment gain on insurance transactions (IGIT) measures investment performance by comparing investment income allocated to the WC line of business with the corresponding earned premium. At
AIS 2022, the IGIT for Calendar Year 2021 was estimated to be 12% of net earned premium. Updated industry data indicates a ratio of 10.9%, which is below the long-term average.
The WC pretax operating gain measures the overall financial performance of the WC line of business, reflecting both underwriting and investment income. The Calendar Year 2021 underwriting gain of 12.8%, combined with the investment gain of 10.9%, resulted in a WC operating gain of 23.7% for that year. This value is slightly lower than the preliminary estimate of 25% shared at
AIS 2022 and marks the fifth consecutive operating gain exceeding 20% for the WC industry.
Preliminary 2022 Analysis
Changes in rates/loss costs impact premium growth and are one of several factors, such as changes in the economy, cost containment initiatives, and reforms that may impact overall system costs. All else being equal, NCCI expects premium to decrease in 2022 by 7.5%, on average, as a result of rate/loss cost filings made in jurisdictions for which NCCI provides ratemaking services. Improved experience driven by long-term declines in lost-time claim frequency has contributed to this decrease. The changes shown below reflect both voluntary and assigned risk market approvals.
On a countrywide basis, NAIC private carrier DWP increased 9.9% through the first two quarters of 2022, compared with DWP through the first two quarters of 2021, despite the expected premium level decrease from rate/loss cost filings in 2022. The table below summarizes the cumulative DWP changes through the first and second quarters of 2022, compared with the same time periods in 2021.
Quarterly NAIC Annual Statement data does not include NWP information. Assuming changes in Calendar Year 2022 DWP and NWP will be similar, and the cumulative change in DWP remains consistent during the second half of 2022, it is reasonable to expect that the countrywide WC Calendar Year 2022 private carrier NWP total will be larger than the $38.2 billion figure observed for 2021.
The DWP change of +9.9% through the second quarter of 2022, relative to the second quarter of 2021, may be partially due to audit-return premium and economic rebound experienced in Calendar Year 2021. Because the COVID-19-related economic recession caused payroll declines on policies effective in 2020, Calendar Year 2021 premium volume may have been lower than it otherwise would have been. This, combined with strong employment levels in 2022 and wage increases, may be driving the larger-than-usual premium increase observed through Second Quarter 2022.
The countrywide combined ratio is calculated on a direct basis as the sum of losses and expenses divided by premium. The largest components of the combined ratio are the direct earned premium (DEP) and direct incurred losses (DIL). The table below summarizes the cumulative changes in countrywide private carrier DEP and DIL through the first and second quarters of 2022, compared with the respective time periods in 2021. DEP increased 8.0% through the first two quarters of 2022 compared with the first two quarters of 2021, and DIL increased 2.8% over this same time period.
As with NWP, quarterly NAIC Annual Statement data does not include net earned premium (NEP) or net incurred losses (NIL). As such, we have assumed for the sake of this analysis that the Calendar Year 2022 changes in NEP and NIL will approximately equal the cumulative changes in DEP and DIL, respectively, and the cumulative changes in DEP and DIL observed through Second Quarter 2022 will be similar at year-end. Further, because the quarterly NAIC data does not contain expenses by line of business, we have assumed for the sake of this analysis that WC expense ratios for 2022 will be equal to a three-year average of the expense ratios from Calendar Years 2019 through 2021.
Based on these assumptions, NCCI estimates that the countrywide WC Calendar Year 2022 private carrier combined ratio will be lower than that for 2021. NCCI will share its updated estimates for 2022 at AIS 2023 scheduled for May 8–10, 2023.
Notes
This document includes assumptions and projections. As with any prospective analysis, there exists estimation uncertainty in these assumptions and projections. Areas of this analysis subject to estimation uncertainty that could have a material impact on the results include:
- Third and Fourth Quarter 2022 DWP, DEP, and DIL changes
- The relationship between direct and net business
- The expected expense ratios
- The impact of changes to laws and regulations
This article is provided solely as a reference tool to be used for informational purposes only. The information in this article shall not be construed or interpreted as providing legal or any other advice. Use of this article for any purpose other than as set forth herein is strictly prohibited.
