The Workers' Compensation Insurance Rating Bureau of California
yesterday released its study of insurers' experience in 2006,
reflecting continuing declines in costs and an industry that may be
over-reserved by about $6.5 billion. This figure is based on
expected claims losses reported by insurance companies and what the
Bureau estimates those claims will ultimately be. The wide
difference portends further reserve releases this year.
Aggregate workers' comp premiums last year plunged 30 percent to
$16.5 billion from $21.4 billion in 2005 thanks to the effects of
reforms in 2003 and 2004. The average workers' comp rate per $100
of payroll was down to $3.25 in the second half of 2006, compared
to $3.78 in the first half and a high of $6.47 in the second half
of 2003.
While most cost and pricing indicators continued to fall,
according to the Bureau's analysis, the biggest change was the cost
of individual claims. After four years of straight declines, the
ultimate average cost of a claim in 2006 at $40,999, up a whopping
23 percent from 2005. The change was driven by both rising
indemnity and medical costs on a per-claim basis. The upshot of
this is that although claims counts and aggregate claims costs have
fallen, the more severe claims are the ones that are still in the
system.
In another surprise, it estimated ultimate losses in the 2006
accident year at $6.4 billion, a significant rise from $5.8 billion
in 2005. Also, the ultimate 2006 accident year loss ratio was
expected to rise to 37.1 percent from 27.1 percent in 2005.
The Bureau ascribed the likely loss increase rise to the fact
that premiums have dropped so quickly in relation to claims costs:
"This loss ratio, while still very low compared to historical
norms, represents a 10 percentage point increase from the estimated
accident year 2005 loss ratio. This increase is primarily the
result of declining premium rates."
Besides falling claims costs, frequency also continues to fall.
It slipped yet another 10 percent in accident year 2006.
And that, as they say, is -30-