Federal tax reform contributes to midyear comp rate reductions

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Provisions of the Tax Cuts and Jobs Act have resulted in proposals and approvals for midyear workers compensation rate reductions in five states, according to details behind several recent filings by the National Council on Compensation Insurance.

Rate reductions will go into effect July 1 for Idaho and Florida, per recent regulatory approval. Reductions have not been announced in other states.

Yet insurance market analysts say the reductions — between 1.8% and 4.7%, as filed by Boca Raton, Florida-based NCCI — can also be attributed to the competitive marketplace for comp coverage.

Sid Ghosh, New York-based vice president and senior analyst for Moody’s Investor Services Inc., called it an “oversimplification” that the tax plan alone would account for reductions.

“Workers compensation rates are coming down … when you consider a whole bunch of factors that go into pricing.”

Mr. Ghosh highlighted the steady decline in claims frequency in workers compensation and stagnant severity.

“Workers comp has been very profitable for the past few years,” said Meyer Shields, Baltimore-based managing director for Keefe, Bruyette & Woods Inc.

Comp rates have seen a steady decline over the past several years, he noted.

Jim Auden, Chicago-based managing director in the insurance group for Fitch Ratings Inc., called workers comp the “most profitable segment right now” among property/casualty insurance lines.

“For the past three years, comp has produced good underwriting results,” Mr. Auden said. “That’s a function of passing some (state) reforms … of stable loss costs and medical costs. It’s created an unusual profit opportunity … Good performance breeds competition in the marketplace. Rates would be going down anyway.”

That federal corporate tax rates are down, however, will contribute to an expected downward trend in rates, analysts said.

“That 14% decrease (in the top corporate tax rate) is not pocket change; it’s substantial,” said Mr. Ghosh.

According to NCCI paperwork, the ratings agency made law-only rate filings as a result of the enactment of the federal Tax Cuts and Jobs Act in the following states in which NCCI files full rates on behalf of insurers: Arizona (down 4.7%), Florida (down 1.8%), Iowa (down 1.9%), Idaho (down 3.4%) and Illinois (down 3.3%).

Summarizing the new tax environment behind these changes, NCCI stated in documents that the new plan included a top corporate tax rate decrease — to 21%, down from 35% — and that the proration provision for tax-exempt income increased to 25% from 15%. The ratings agency also noted that the tax plan included a deduction for qualifying dividends, down to 50% from 70%; changes to reserve discount factors; and a rule that the deduction for business interest expense is limited to the sum of business interest income, which is the amount of interest includible in gross income, not to exceed 30% of adjusted taxable income.

Mr. Shields added that “the bad news” for insurers is that “an inevitable consequence of profitability (found as a result of the tax plan) is that rates are generally not allowed to be excessive, inadequate or unfairly discriminatory,” per regulation for insurers.

“At current levels … there is the argument to be made that the rates are excessive,” he said, adding that the insurers will also cut rates to remain competitive.

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