Heavy Fed Rate Cut – Any Workers Comp Effect?
The last time the Fed rate cut the interest rate so much was in 2008 – post-financial crisis. Let us look back at 2008 – 2009. Follow this link to a great four-page article by Stephen Klingle, NCCI President at the time. This link will provide you with a great four-page article written in 2009.
Some of the info covered in the article sounds eerily the same situation as what we have experienced over the last few years leading to a heavy Fed rate cut of one-half point. The tone of Klingle’s article was one of cautious optimism.
From his article –
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Among the uncertainties cited by NCCI:
- Medical increases placing upward pressure on costs
- Low investment yields putting pressure on insurers’ ability to earn an adequate return on capital
- A fluid political landscape in many states and at the federal level that put additional pressure on regulation and reforms
- The current underwriting cycle moving past its cyclical peak
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Now that sounds similar to today’s Workers Comp environment before the Fed rate cut. Some of the other sections in the article were: (paraphrasing): (my comments in italics)
Positive trends we’ve observed from the past several months include:
- Frequency continues to decline – as it has for many years and still today
- Reserves appear adequate – as they do now
- Residual markets are depopulating in most states
- The Federal Terrorism Risk Insurance Program was renewed for seven years
Among continuing areas of concern are:
- Economic recession
- Medical costs
- State and federal reform challenges
- Low investment returns
- Underwriting cycle
One can see that Workers Comp changes, and changes very little from year to year. The Fed rate cut has sparked the investment markets somewhat
One final note from Klingle’s article – the stats
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The final 2007 calendar year combined ratio for the workers compensation industry was 100.7%. The
components of the final 2007 combined ratio were:
- Loss ratio: 60.1%
- Loss adjustment expense ratio: 14.6%
- Underwriting expense ratio: 24.6%
- Dividend ratio: 1.5%
With the exception of the expense ratio, all of these metrics were as expected.
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I would suggest that you download and read the article from the last time we were close to or in a recession from the head of NCCI at the time.
