Work Comp Combined Ratio Under 100
The subject of Work Comp Combined Ratio seems to be appearing more in the insurance press lately. I was unable to attend the NCCI Annual Issues Symposium. However, I did make it to their data conference in March of this year.
One of the better definitions of the Combined Ratio can be found here.
The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium. The ratio is typically expressed as a percentage. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100%, a company can potentially still make a profit, because the ratio does not include the income received from investments.
The Work Comp combined ratio for all insurance carriers for 2014 was 98%. When a carrier is able to write WC insurance at some type of profit, this ensures a healthier market. According to the NCCI State Of The Line -see Slide 13 from the presentation – the Combined Ratio = (Loss + Loss Adjustment Expenses + Underwriting Expense + Dividends) / Earned Premium.
Insurers like to see that they do not have to rely on investment earnings to cover all the expenses of writing WC. Operational efficiency is a C-level buzzword that refers to the Combined Ratio.
The last time that a Combined Ratio came in under 1.0 was in 2006. The ratio that year was 93%. One has to remember that NCCI does not cover all states. They do cover just less than 40 states. This is a large enough percentage to reflect most, but not all of the WC market.
You may want to peruse all of the slides in the presentation. NCCI always performs a great job when it comes to PowerPoint slides.
California has not been below 100% on their Work Comp Combined Ratio since 2007. However 2014 had shown a great improvement. Check out the WCIRB Analysis here and then go to Exhibit 6 to see California’s combined ratio for the last few years. The 2014 year’s ratio was 105%.
The nightmarish years for California’s Combined Ratio was in the 1990’s when it exceeded 150%. The State Fund ended up with almost the whole market due to such heavy underwriting losses.
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