As the line most sensitive to economic cycles, analysts at AM Best expect that workers’ compensation lines will continue to experience the negative impacts of the COVID-19 pandemic acutely over the long-term.
The economic downturn caused by the pandemic caused massive unemployment in the US and had a material effect on property and casualty (P&C) coverages, AM Best notes, including workers’ compensation.
The most significant job losses happened early on, in the spring of 2020, with industries such as leisure and hospitality, retail, business, education and health among the worst hit.
Job losses started to decline in the second half of 2020, particularly towards the end of the year, and then a hiring surge in the first quarter of 2021 began to reverse the impact of the pandemic on payroll, employment and wage growth statistics.
However, AM Best maintains a negative outlook on the workers’ compensation segment due to continued uncertainty about the effects of COVID-19, both from an economic and a regulatory perspective.
And while the impact of the pandemic on insurers’ balance sheets has been tempered somewhat, concerns about the prolonged low interest rate environment persist.
As a result, investment returns are expected to remain flat, and analysts warn that insurers may begin seeking riskier investments to generate higher yield.
The main offsetting factor for AM Best’s outlook is the segment’s risk-adjusted capitalization, which the rating agency believes will withstand the impact of the pandemic over the long term.
Additionally, the segment has historically been in a redundant loss position, which remained the case through the end of 2020.
While there could be some favourable short-term benefits for workers’ compensation insurers, such as declines in fraud, workplace accidents and defense costs, AM Best ultimately believes these will be outweighed by economic and financial market concerns, along with the possibility of significant claims latency, as the long-term health effects of the virus emerge.