At the 2019 SAWCA Annual Convention, Tom Hebson from York Risk Services gave a presentation on market cycles in workers’ compensation.
Workers compensation has long been characterized by “hard” and “soft” market cycles. In a hard market cycle competition is limited and rates rise. In a soft market cycle you see more completion which drives rates downward. These market cycles are not necessarily linked directly to changes in claims costs but dramatic changes in costs can trigger dramatic changes in the marketplace.
Characteristics of a soft market:
- Premiums declining.
- Carrier risk appetites expanding.
- Less restrictive underwriting.
- Increased capital for carriers leading them to increase capacity.
- Insurance carriers reducing prior year reserve redundancies.
- Larger returns on investments by carriers
Characteristics of a hard market:
- Reduced capacity and limits.
- Underwriting criteria becomes more invasive, requiring more information.
- Higher insurance premiums.
- Excess and surplus lines may be used more frequently for coverage.
- Regional dead zones for underwriting business.
- Fewer insurance markets competing for business
- Capital in the marketplace is strong with surplus levels at all time highs.
- The use of other risk financing options continue to grow,
- Global property catastrophic claims have been below average the last few years.
- Competition is strong and carriers are focused on developing product strategies to expand their business.
- Loss ratios are generally in the acceptable range with NCCI indicating the industry had a 83% loss ratio in 2018
- Decreasing or stable frequency of claims.
- Payroll growth and low unemployment.
- Continued technology development by carriers.
- Investment yields remain low but the high surplus available for investment leads to strong investment earnings.
- Global spread of risk.
Things that trigger changes in the marketplace:
- Global catastrophe that impacts both the insurance and reinsurance marketplace. This could be multiple high dollar natural disasters in a short period of time.
- A natural catastrophe in a large population area that has significant impact.
- Reserve redundancies run out and accident year policy experience deteriorates.
- Legislature or regulatory change. Changes in laws or regulations that significantly change the exposures.
- Loss of talent.
- Large verdicts in mass tort litigation.
- Consolidation in the marketplace.
- Unskilled workforce leading to increased accident frequency.
- TRIA non renewal.
- The unknown.
It is important to note that individual segments of a market can have cycles that are different than the greater marketplace. For example, if there was something leading to increased claims for retailers they could see rate increases that were greater than other industries are experiencing.