Marsh and McLennan Agency
The Combined Loss Ratio serves as the best indicator of how the insurance industry has performed and where the industry is going in terms of pricing. Factors like investment return, operating expenses, underwriting costs, etc. all play a role in determining pricing but no single factor reveals more about the future of rates than the Combined Loss Ratio. Simply put, the Combined Loss Ratio is the ratio between premiums received and the cost of claims plus expenses.
Let’s put today’s number in context. In 2010 and 2011, the combined loss ratio for Workers’ Compensation was 115%. Meaning for every dollar of premium collected by the insurance industry a $1.15 was paid out in claims and expenses. The combined loss ratio started improving and in 2012 dropped to 109%. In 2013, the combined ratio was reduced by another 7% points to 102%. Preliminary results for 2014 indicate an industry wide combined loss ratio of 98%. These numbers are very promising and should bode well for aggressive pricing in the future.
The largest contributor to the overall loss ratio is the percentage of losses to earned premium. 2014 was one of the best years ever with incurred losses of 58%. Compare that to 2010 and 2011 where incurred losses were above 70% and it is fairly clear where the difference lies. The second largest expense for the industry was the cost to underwrite policies, 24%. The third largest expense factor was the cost of adjusting claims at 14%. It is important to know the numbers and understand how your individual performance measures up. If you want your Workers’ Compensation program to be aggressively priced, then you better understand how to use these numbers to negotiate pricing.
In previous years when favorable combined loss ratios developed, the insurance industry responded by reducing premiums and aggressively pursuing new Workers’ Compensation business. This same scenario appears to be repeating itself in 2015. In 1Q 2013, 91.8% of companies saw their Workers’ Compensation prices increase. In 1Q 2014 prices increased for 66% of policy holders. 1Q 2015 showed price increases for only 33%. 28.8% remained flat or had no change and 37.9% saw price decreases. It is always dangerous to assume but the numbers are encouraging and the price of Workers’ Compensation has been trending downward. The recent news about the 2014 Combined Loss Ratio has only improved the likelihood of this rate trend continuing.
In addition, changes in NCCI premiums levels that have been approved, or are pending or filed for, show an average Workers Compensation price decrease of 4.4%. How does your state measure up? This is important to know because it can directly impact the premiums you pay for your Workers’ Compensation insurance.
At first glance these numbers can be a little overwhelming but they are important for you and your agency to understand. Arm yourself with the information and ask your agency specific questions. Now is a great time to test your broker relationship and make sure they are informed and best positioned to negotiate the financial terms of your upcoming renewal.