WORKERS COMP AND COVID-19
Agents should be looking at premium audits with great care
By Dennis H. Pillsbury
Unfortunately, employment and the economy have taken serious hits due to the pandemic. As of this writing in early December, there are still approximately 20 million Americans who are unemployed and, although this represents an improvement from the early days of the pandemic when a shutdown of the economy occurred, all agree that the numbers are still far too high. Perhaps most startling is the dichotomy where many are suffering at one end of the scale, while at the other end of the scale the Dow appears to be doing fine. Many of the larger companies are enjoying record earnings, thanks to their ability to respond to changing public needs during the pandemic.
Fortunately, the workers comp industry entered 2020 in excellent shape. The National Council on Compensation Insurance (NCCI) reported that the industry for calendar year 2019 had a net combined ratio of 85.4% on premium volume of $42 billion. This is the second lowest combined ratio in recent history and represents the sixth consecutive year in which the industry has enjoyed an underwriting gain. At the same time, the industry had an investment gain on insurance transactions of 10.6%, resulting in a pretax operating gain of 25.2%. This is the third consecutive year in which the industry operating gain exceeded 20%.
“[G]oing forward, we could see that many of the changes brought about by COVID may be permanent or, at least, long lasting.”
Senior Division Executive
The results reflect, in large measure, the effective loss control efforts the industry and the risk management community have undertaken. This has resulted in a steady decrease in lost-time claim frequency (with one notable exception in the year following the Great Recession which will be discussed later as we look at what might happen when we emerge from the pandemic). Since 2004, the cumulative decrease in premium has been 44%.
For 2020, we can expect to see yet another decrease in premium since the NCCI has filed for average decreases of 7.2% in states where it provides ratemaking services.
Jeff Eddinger, senior division executive with NCCI, points to a number of concerns arising from COVID-19 for the workers comp industry. “While overall claim volume is down due in part to less employment, there now are COVID claims being made and paid and there has been no premium collected to cover COVID losses,” he says, “and there’s definitely an impact stemming from delays in treatment that may have been caused by the lockdown or because people feared going to the hospital in areas where the coronavirus was virulent.
“Some surgeries have been delayed or put on hold,” Eddinger adds. “Physical therapy, because of social distancing requirements, has been on pause. As a result, there could be a lot of pent-up demand when things loosen up. There’s also the concern that when treatment is delayed, the ultimate costs rise. Many of the delayed treatments may be for claims that are already reflected in the reserves, but the amounts may prove to be inadequate.
“To me,” he continues, “the indirect impact of COVID may prove to be the largest impact. We know about the current results on employment and the economy in general, but going forward we could see that many of the changes brought about by COVID may be permanent or, at least, long lasting.
“A lot of people have seen their jobs change or, in some cases, the way that they do their job has changed,” Eddinger notes. “A number of employers have found that some employees actually are getting more done while working from home and others definitely have not. Will this result in greater numbers of employees working from home?
“Obviously, the travel industry has been impacted,” he continues. “What percentage of people will return? Businesses and associations have learned to meet via Zoom. It’s certainly more cost-effective. Will this result in less business travel in the future?
“We’re in the process of talking to some companies and risk managers about these concerns to try and get a better picture of how the workplace will look in the future,” Eddinger explains. “Will masks and temperature checks become the norm as part of a company’s safety culture? What happens in industries where social distancing is difficult? What steps will they take to mitigate risk?”
He concludes that “pandemics are a new risk for the workers comp industry. We have to figure out a way to address that.”
And, of course, that means the industry will be looking carefully as the data comes in from this year’s experience. It will be interesting to see what the results are for the industry overall when NCCI holds its Annual Issues Symposium virtually in 2021.
The agent’s role
We talked to Kevin Ring, MWCA, CWCA, chief operations officer and lead workers comp analyst for the Institute of WorkComp Professionals, about the role agents should be taking in helping clients mitigate risk and making certain that premium audits reflect changes they may have experienced due to COVID-19.
“Agents need to be especially diligent in making sure premium audits are correct this year,” Ring says, adding that “premium audits are routinely incorrect because employers don’t always keep adequate records. This year, that will be an even bigger challenge, as audits will be done electronically rather than by human beings. So there won’t be a good auditor coaxing your client through the process. And even though there is an exclusion for furloughed employees’ salaries, that doesn’t mean that the audit will catch that unless employer records are clear and accurate.”
“[In California] you only get a one-time switch from ‘employed’ to ‘furloughed.’ … It’s imperative that agents stay educated about what’s changing and what’s not.”
—Kevin Ring, MWCA, CWCA
Chief Operations Officer and Lead Workers Comp Analyst
Institute of WorkComp Professionals
He goes on to point out that rules vary by state, and that could also create confusion. For example, as of December in California, “you only get a one-time switch from ‘employed’ to ‘furloughed.’ You can’t be furloughed a second time. It’s imperative that agents stay educated about what’s changing and what’s not.
“In some industries, employees have gotten hazard pay; that additional bump in salary is not excluded from the premium calculation,” Ring warns. He also says that the source of the salary is irrelevant. “I ran across an employer who used PPP (Paycheck Protection Program) money to pay employees and thought that would mean the salary is excluded from workers comp premium calculations; it’s not,” he says. “PPP is simply a loan given to businesses to help them through the crisis, but does not mean that the employee being paid in that way is considered a furloughed employee. Again, the records need to reflect the employee’s actual status.
“Employee classifications also may change, and agents need to make certain that they really know what their clients are doing to cope with the COVID crisis,” Ring adds. “If many of their employees are working from home, should they be reclassified as clerical telecommuters or, in some cases, computer programmers?” One hypothetical example Ring offers is a machinist who also inspects the machinery. “What happens when he starts doing that from home? Is he a machine operator or a computer operator?”
He acknowledges that a number of companies have made a significant pivot in order to survive. “These workplace changes must be taken into account when developing the proper classification,” he says. “One example here in my hometown involves a small craft distillery that started making hand sanitizer when its original business started to dry up.” (I apologize for that. Kevin didn’t make that pun. The final two words in the quote belong to the writer. Sometimes, I just can’t help myself.)
Ring continues by noting that “coming out of this, employers will be faced with the deepest labor pool ever. Agents can play an important role in helping employers make sure they hire people who are fit to do the work. Safety people do a great job with traditional safety needs, but will employers need to use pre-employment medical screening?
“An outsized percentage of claims occur with employees who have been employed less than a year,” he adds. “Hiring and training will be paramount. Agents who can help clients with that will place their clients in a much better competitive position when the workplace returns to whatever is the new normal after COVID.
“People who hire well enjoy better workers comp premiums but also are better competitively. Agents who help clients achieve that will be helping to create that client for life; that is the ultimate goal,” Ring concludes.
Coming out on the other side
The question of claim frequency and audit premiums following a recession caused by a “normal” economic downturn or a pandemic has been looked at by NCCI. During the Great Recession of 2007-2008, earned but not reported (EBNR) premiums fell starting in the second quarter of 2008 and ending in the third quarter of 2009. This is not surprising but is quite rare.
For all other quarters from 2006 through 2018, there was a positive EBNR, which meant that audit-additional premiums remained relatively stable, reflecting steady economic growth where employers, overall, increased salaries to reflect growth in profit and/or employment. However, when employment was impacted by the economic recession, the EBNR was negative, reflecting more audit-return premium. There is reason to expect that this will occur over the next few quarters.
The study also shows that there was an increase in lost-time claim frequency in 2010, as many workers either returned to work or started working at new jobs. This upward tick, fortunately, was a one-time occurrence and the improved lost-time frequency continued in the following years.
Again, we can anticipate something like this once the job market starts to stabilize, but it does point out how important careful hiring needs to be following the pandemic.
For more information:
Institute of WorkComp Professionals
National Council on Compensation Insurance
Dennis Pillsbury is a Virginia-based freelance insurance writer.