An oasis in a dry desert; an island in stormy seas
By Joseph S. Harrington, CPCU
Anyone who watches broadcast media coverage or engages in social media commentary knows that these are tumultuous times of distress and anger over economics and politics.
But you would never know that from the business of workers compensation insurance, which carries on serenely despite the effects of the COVID-19 pandemic, labor market strains, hyper-partisan politics, and inflation that have caused widespread disruptions throughout the economy.
In 2021, for the fifth year in a row, the workers compensation line achieved a combined ratio below 90, according to the National Council on Compensation Insurance (NCCI), the nation’s leading advisory organization for workers comp. It’s been nine years since the business had a combined ratio above 100.
Workers comp carriers are benefit-ting from recent wage growth, which boosts the payroll component of rating, along with a slow decrease in lost-time claim frequency, a trend the NCCI believes will continue.
Why does workers comp continue to perform so well at a time when property insurance lines are battered by natural and man-made disasters and other liability lines struggle with “social inflation” and “nuclear verdicts” driven in part by the actions of third-party litigation funders?
“The sustained stability of workers comp insurance over the past several years is due to increasing understanding of risk characteristics and better utilization of underwriting and claims data,” says Matt Frazier, chief analytics officer at Pie Insurance. “So, while average claim costs have increased, overall accident frequency has decreased, and rating bureaus have done a very good job of assessing these trends.”
“[W]hile average claim costs have increased, overall accident frequency has decreased, and rating bureaus have done a very good job of assessing these trends.”
Chief Analytics Officer
Recent experience in workers comp is demonstrating how it is one line where insureds can truly control their cost of coverage by adopting and maintaining a comprehensive safety culture, according to Patricia Corrigan Johnston, managing director at Risk Strategies.
“Unlike other lines of insurance, where an insured has less control over its rates, a workers comp experience modification factor is unique to each insured and contemplates only the actual losses of that insured,” she says. “The better an insured’s loss experience, the lower their experience ‘mod’ and the larger the credit they receive.”
Steve Love, CEO of SolePro, agrees that, apart from medical inflation, workers comp is less directly affected by economic trends that are disrupting other lines.
“There are many supply chain issues resulting in rising costs,” he says. “Take a car accident for example. Think of how much more it costs to fix your car now. It takes longer to get parts, and they are much more expensive. The cost of auto repairs has skyrocketed and the same has happened with housing construction costs.”
The era of 8871
The COVID-19 pandemic brought about a lot of changes in workforce management, and one of them was implementation of workers comp class code 8871 (Permanent Telecommuter), developed to distinguish employees working regularly from home from their office-based counterparts.
According to Johnston, rates for insuring 8871 employees may be only marginally less than for office-based workers, but the new categorization raises more substantial questions regarding claims.
“If I trip and fall while ascending stairs to my home office during working hours, is an injury from the fall a workers comp claim?” she asks. “If I develop carpal tunnel syndrome because my home office is not set up in an ergonomically correct fashion, is that the responsibility of my employer? “I expect that there will be some interesting claims and interesting defense of those claims.”
Love from SolePro concurs.
“The rise in work-from-home employees could definitely disrupt the workers comp market,” he says. “You don’t know what employees are doing, and if they’re hurt on or off the job. They could be doing yard work, trip, and hurt their back. Essentially, it turns workers comp into 24-hour coverage.”
“Should someone who is injured while impaired by voluntary use of some substance be held liable for contributory negligence to their injury? While I don’t think it’s a bad idea, I think it would be a tough sell.”
—Patricia Corrigan Johnston
Johnston is also watching for the impact of legalized recreational marijuana on workers comp claims.
“Workers comp coverage and claims handling will have to find a way to adjust to legalize marijuana,” she says. “Should someone who is injured while impaired by voluntary use of some sub-stance be held liable for contributory negligence to their injury?
“While I don’t think it’s a bad idea, I think it would be a tough sell. But it doesn’t seem fair that employers are solely responsible for the safety of employees who are working in a less-than-sober state.”
Threats and opportunities
Not all is well in workers comp, however, and several looming factors could quickly lead to more challenging market conditions.
While the market is stable, pricing is too volatile, according to Love. “I don’t like seeing the yo-yo pricing,” he says. “There shouldn’t be 20-point swings in bureau loss costs. It’s not fair to the buyer, and it’s a cycle that needs to be broken.”
“The rise in work-from-home employees could definitely disrupt the workers comp market. You don’t know what employees are doing, and if they’re hurt on or off the job.”
To break that cycle, Love encourages the NCCI and state workers comp bureaus to use more fully developed loss costs and better recognize the impact of released loss reserves.
Macroeconomic conditions could pose a threat to the line, according to Frazier.
“The most imminent threat is access to capital markets, which has become challenging in today’s economy,” he says. “A higher cost of capital and lower return on float could increase reinsurance costs, resulting in rate level increases, especially for higher hazard businesses, like transportation, construction, and heavy manufacturing.”
Johnston sees federal regulation of workers comp insurance as one way to keep the cost of coverage down.
“I strongly believe that federal standards and administration would simplify the process, especially for multi-state employers,” she says. “Federal regulation might reduce the number of fraudulent or embellished claims.
“Also, if workers compensation is supposed to be the ‘grand bargain,’ then make it such and disallow frivolous, money-grab lawsuits, which add substantially to the cost of a claim and the length of time it remains open.”
For more information:
National Council on Compensation Insurance
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance cover-ages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.