Steven Bell Vice President of Underwriting and Sales, Lovell Safety Management Co., LLC
Despite the on going inflationary environment, workers’ compensation costs are set to decrease for the eighth consecutive year on October 1, 2024. Overall, loss costs and resulting rates will drop by an average of 9% across all class codes. However, this change may vary depending on specific class codes, with some seeing increases and others decreases, but the overall net decrease averages 9%.
During this same period, workers’ compensation insurance carriers have enjoyed several profitable years. Their profitability is typically measured by the combined ratio, which compares total expenses—including losses and operational costs—against premiums earned. The chart below highlights the accident-year combined ratio performance in the New York State (NYS) workers’ compensation market, consistently showing combined ratios below 100%.
Accident Year Combined Ratios
Source: NYCIRB State of the System 2023
Understanding the Combined Ratio
So, what does this mean? For every $100 of premium earned in 2023, carriers paid out $90.10 in expenses and losses, leaving the remaining 9.9% as underwriting profit. It’s worth noting that the combined ratio does not account for investment interest income, which can be significant for workers’ compensation due to the long-tail nature of claims. Workers’ compensation has been a reliable profit center for many carriers, thanks to factors such as reduced claim frequency and severity. Moreover, wage growth during this period has increased premiums for carriers, further contributing to their profitability.
Declining Rates Amid Carrier Profitability
While insurance carrier profitability has remained stable, workers’ compensation rates have steadily declined. Since 2017, rates have cumulatively decreased by an average of 53.9% across all class codes. In the same timeframe, wages have increased by approximately 34.5%. Although rising wages have offset some of the rate decreases, employers who haven’t seen corresponding wage growth should have experienced a reduction in their workers’ compensation costs. The ongoing profitability of the market, paired with decreasing rates, may seem counterintuitive, but the key question for many employers is whether these benefits have translated into lower overall costs for them.
Safety Groups: A Path to Profit-Sharing for Employers
For employers looking to capture the benefits of underwriting profits, there are alternatives in the fully insured market that offer low-cost, low-risk options. One such program is the workers’ compensation safety group, which operates with a different model that prioritizes the financial well-being of participants.. A safety group is a collection of businesses who are in the same trade or industry. The members of the safety group are homogeneous or have similar work conditions, safety hazards, and job risks.
Employers with similar operational hazards are grouped together to reduce their workers’ compensation costs, spreading the risk from the individual policyholder to the entire group. The premiums of the group are pooled together, while the group works to improve safety and limit injuries. These fully insured, not-for-profit programs compile members’ annual workers’ compensation premiums and then deduct the costs of claims plusand administrative expenses and charges are deducted. All safety groups maintain a contingent balance to fund future increases of on–going claims. Any money left over after accounting for these expenses is available for payment of a dividend.
The Benefits of Safety Group Programs
For businesses in New York State, joining a safety group program is a proven strategy for reducing insurance costs and ensuring excess premiums are returned as dividends. These programs incentivize employers to maintain safe working environments, fostering a culture of prevention that benefits both employees and the bottom line. The potential savings in a safety group depend on how the group is managed and its combined ratio. For members of Lovell Safety Management’s 13 industry-specific safety groups, over $1.24 billion has been returned to participants in the form of dividends to date.
A Proven Path Forward
The workers’ compensation rate decrease on October 1, 2024, marks yet another chapter in an eight-year success story for the industry. Workers’ compensation safety groups, in particular, stand out as a model for how businesses can thrive under a well-managed insurance program. While insurance carriers have benefited from lower rates and improved profitability, participants in workers’ compensation safety groups have shared directly in the financial rewards, enjoying both reduced rates and returned higher dividends. As safety groups continue to prioritize safety and financial transparency, their members can look forward to sustained savings and ongoing financial returns for years to come.
For more information on Workers Compensation Rates or similar issues you may contact Lovell directly at 1-800-556-8355 or visit online at www.LovellSafety.com.