AM Best sees strain in workers' comp profit margins

By Navneeta Nandan Oct 12 (The Insurer) — Workers' compensation continues to be profitable, but there are early signs of strain in reserve cushions and accident year profits, AM Best said on Monday. In a market segment report, the rating agency said that insurers who write workers' compensation produced another year of strong underwriting profits in 2025, due to dissipating but still favorable prior-year loss reserve development and enhanced workplace safety measures. It was also supported by continued improvements in workplace safety, driving its results to outpace those of the commercial lines segment in the aggregate.

However, the favorable development in 2025 exceeded the underwriting profit, suggesting on a normalized basis, the accident year 2025 results may have actually reflected an underwriting loss. Additionally, pricing cuts appear to be accelerating in a very competitive market, indicative of insurers willing to accept a lower profit margin to hold on to profitable accounts, AM Best said. " Underwriting profit margins have tightened in recent years, providing evidence that "the market may be turning", as rising medical costs and reserve adequacy concerns challenge the level of profitability.

AM Best said the line's combined ratio in 2025 was the highest it has been in the past decade and loss reserve redundancies had dissipated noticeably. 2%, which was lower than all the major long-tailed casualty lines and lower than the commercial lines segment. The initial accident year loss ratio pick was the highest during the past decade except for the peak Covid period of 2020, which was marked by lower workers' compensation premium, and 2021, reflecting the return to work spike. Favorable prior-year loss reserve development continued in 2025, although the magnitude was the smallest since 2017.

AM Best said that, as per the Council of Insurance Agents and Brokers, workers' compensation pricing cuts have been accelerating. The three steepest pricing cuts in the post-Covid environment have all been within the past five quarters. 7% was the deepest pricing cut in a decade. "With profit margins already shrinking in 2025 compared to prior years, it is likely that steeper price cuts will further diminish those margins," the rating agency said.

The favorable loss development is one of the big profit drivers for the line, actually exceeding the total profit by over $3 billion. AM Best said that this means the most recent accident year results, AY 2025, may be showing underwriting losses. In the past decade, the workers' compensation line has benefited from favorable development. For the past nine years, it has accounted for at least 10 points on the workers' compensation calendar year loss ratio.

However, AM Best said that this analysis points to a possible turning point in the workers' compensation line. "The initial loss ratio pick for accident year 2025 represents the highest initial loss ratio pick of the past 10 years, except for the peak Covid years of 2020 and 2021. The calendar year 2025 loss ratio was higher than any year since 2017. " The decrease in the line's loss reserve deficiencies and redundancies also highlights the market cycle that indicates a potential turning point.

Through the past 10 years, the reserve position for the workers’ compensation line as a whole has been strong with redundant reserves. The redundancy is now weakening and is at its lowest level since 2021. AM Best said that the next 12 months will provide significant insight into whether this is a trend. The rating agency noted that increased competition bringing pricing cuts, coupled with the line's reserve redundancy dissipating, could limit profitability going forward.

However, as long as the line remains profitable, competition-driven pricing cuts are likely to continue. Results through the second quarter of 2026 suggest those profits are thinning. The mid-year direct incurred loss ratio was the highest of the past five years, indicating that bottom-line results may continue trending unfavorably. If this continues, the long-term trend of declining premiums would be expected to cease with companies focusing on reversing the negative underwriting results trend.

AM Best added that changing economic markets could also limit premium growth. Increased AI takeover could cut into payroll or possibly shift business to lower-risk class codes, bringing a reduction in total premium. Additionally, the demographic shifts in the employment base, where older workers are replaced by younger workers, who are relatively small compared to other generations, could lead to a decrease in payroll and thus a drop in premium. The rating agency said that after an extended period of limited medical severity trend increases, the pace of increases seems to be picking up.

From 2009 to 2020, medical severity trend was muted, which seems to have reversed. In recent years, it has exceeded core inflation. 7%. The top 25 groups make up just 67% of the total market premium, which is a low percentage compared to other P&C lines.