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AM Best revises workers’ comp segment to ‘stable’ from ‘negative’ on muted Covid impact

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AM Best revised its outlook for the workers’ compensation segment to stable from negative on Wednesday, citing a series of factors, including an “unexpectedly muted impact” of the Covid-19 pandemic, favorable combined ratios and a redundant loss position.

The ratings agency noted, however, that there are some counterbalancing factors, including state rate decreases, claims latency, rising competition and the potential for regulatory and legislative actions that affect the ultimate costs of certain claims.

While there are still many unknowns surrounding the pandemic’s effect across the economy, AM Best said that the impact of Covid-19 on insurers’ balance sheets and operating performance is muted so far.

Top lines were hit early in the pandemic, but premium levels are returning to pre-2020 levels as businesses, particularly the hospitality and service industries, reopen.

AM Best said the segment’s “solid level of risk-adjusted capitalization will withstand the effects of the pandemic”.

The segment remains in a redundant loss position, the ratings agency said, although the redundancy is diminishing. Combined ratios, driven by consistent loss ratios, remain favorable, and underwriting results have deteriorated only slightly as fraud, workplace accidents and defense costs all slid.

There are, however, some potential negatives looming that AM Best said it would “continued to monitor for longer term implications”.

“The segment remains anxious as states continue rate decreases, with this compression pressuring the direct loss ratio,” AM Best analyst Jacqalene Lentz wrote.

“Although the line has benefitted in recent years due to a decline in lost-time claims frequency and active improvement in workplace safety,” she wrote, “the possibility of claims latency and the potential long-term health effects of the virus remain a concern, along with regulatory and legislative actions that could affect the ultimate cost of certain claims.”

Another concern is “intensifying market competition,” which “may lead to a lack of underwriting discipline,” AM Best warned.

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