While the economy is showing signs of improvement, workers' compensation could face different directional trends, resulting in a complex mixture of improvement and further deterioration, according to a new study by Conning Research & Consulting.
"The workers' compensation line of insurance saw its last year of underwriting profit in 2006," says Joshua Youdovin, analyst at Conning Research & Consulting. "The economic recovery and rate increases will boost premium, yet we expect that rising medical costs and increased utilization of drugs will re-introduce the specter of inflation in loss costs and reduce profitability even further."
Youdovin also notes that the line has been impacted by declining investment yields, which has created headwinds against overall profitability. While there are early signs of economic improvement, this could bring new surprises regarding risks and opportunities in the line.
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"Workers' compensation insurers face many challenges in the recovery from the recession, and these challenges are likely to vary by state and industry focus, among other factors," says Stephan Christiansen, director of research at Conning Research & Consulting. "Future profitability will depend on how well the insurers can adapt to these changes and manage both the assets and liabilities on their balance sheets. Cooperation with people in the medical community – the injured workers and employers – is essential for controlling the rising tide of loss costs.
"Companies will compete in different ways and at different rates of response to these changes. State governments and insurance departments also will need to lead the way, using lessons learned from successful state reforms in the past as the workers' compensation industry resets for the future."
The study, "Workers' Compensation: A Bumpy Road from Recession to Recovery" examines performance drivers, state differences, industry variations and insurer behavior as well as investigating how insurers can prepare for this time of intense change.
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