Risk & Insurance

August 23, 2012

Net premiums written by state funds increased more than 7 percent in 2011. The market is likely to see more significant growth than the rest of the workers' comp industry this year, according to a new analysis from A.M. Best.

State funds typically serve as guaranteed markets for companies that have difficulty obtaining insurance in the general marketplace. The recent years of soft conditions is changing, resulting in net premiums written improving in all state funds except the State Compensation Insurance Fund of California and the State Workers' Insurance Fund in Pennsylvania.

The overall 7.1 percent increase among the 20 state funds marked the end of the decline in net premiums written that had occurred from 2004 to 2010. In its report, State Funds' Net Premiums Written, Surplus Grew in 2011: Signs of Change Ahead, Best cited these factors leading to the increased premiums:

• Improved premium audit adjustments. As payrolls stabilized in 2011, most companies found audit results also stabilized with lower return premiums or even flat or positive audit results.
• Stabilization of employment and payrolls.
• A trend toward higher pricing. Initially, much of the increase in 2011 was due to reduced use of scheduled debits within rate plans. "However, a number of companies have indicated that they have filed for and received approval of increased rates, which will take effect through 2012."

A variety of factors resulted in the state funds' calendar year combined ratio of 134.9, the highest level in 10 years. On an accident year basis, the combined ratio was up less than 1 point, marking the smallest increase since 2008.

"As market conditions firm and perhaps enter a full-fledged hard market over the next several years, A.M. Best expects the state funds to continue growing at a faster pace than the broad market," the report says. "Overall, it appears as though 2010 may mark the end of the recent cycle for the state funds. While A.M. Best does not believe a traditional hard market has begun, rate increases and anecdotal reports of more stringent application of underwriting and pricing criteria indicate that the stage may be set for a change in the market over the next year."

Whether or not you believe that "a traditional hard market has begun," there is no denying that premiums are on the rise and employers are flocking to state funds. Unfortunately, many employers who go into the state funds fail to realize that although they may experience short-term savings, other factors may lead to experiencing higher costs in the long run. If you have clients that you've lost to the state fund or you are at risk of losing to the state fund because of pricing, there is no better solution than offering them workers compensation premium recovery. Not only will your client see immediate refunds on current and prior years' policies, they will have a better underwriting profile to enter the renewal marketplace with, which will enable you, the broker, to continue earning commissions while keeping your client happy. Furthermore, you will earn first-year and renewal commissions with our workers compensation premium recovery service.