NCCI’s State of the Workers’ Compensation Line 2012: The Struggle Continues

By John Stahl, Esq.

The State of the Workers’ Compensation Line 2012 presentation at the National Council on Compensation Insurance Holdings. Inc.’s, (NCCI) 2012 Annual Issue Symposium discussed trends in workers’ compensation insurance premiums, claims frequency, and related statistics. Dennis Mealy, who is the chief actuary for NCCI’s Actuarial and Economic Services Division, analyzed the factors behind those numbers.

The overall conclusion was that “the workers’ compensation line [of insurance] continues to struggle; underwriting results remain flat and at unacceptably high levels.”

Driving Forces

Mealy attributed the particularly significant impact of recent economic conditions on the workers’ compensation insurance industry to the recession’s “direct connection with employment and labor markets.” That downturn’s disproportionate impact on the manufacturing and construction industries, as compared to other economic sectors, was another cited factor for several workers’ compensation statistics.

The recession was also considered relevant regarding the workers’ compensation claims frequency rate. The theory was that employees were less hesitant to pursue workers’ compensation benefits as improving economic conditions reduced fears of losing employment.

The impact of healthcare reform, a.k.a. Obamacare, was less certain; the pending Supreme Court ruling on the legal challenge to that reform was the primary reason for this uncertainty.

More miscellaneous variables that affected workers’ compensation statistics included reforms in individual states and increased viability of residual market workers’ compensation coverage.

Premiums

The good news for the workers’ compensation insurance industry was arguably bad news for employers; private carriers collected $32.2 billion in premiums for workers’ compensation insurance in 2011; this was a $2.3 billion, or 7.9-percent, increase over the 2010 amount.

Mealy partially attributed the increase to improvements in the construction and manufacturing industries. Broader reasons included a 30-percent rise in payrolls and increased audits by regulatory agencies.

Relevant labor statistics showed that the general 2011 employment rate was 95-percent of its pre-recession 2007 level. The statistics for the manufacturing and construction industries were 85 and 72-percent respectively.

Creating further perspective, the statistics demonstrated that workers’ compensation costs were 1.6-percent of employers’ compensation-related expenditures in 2001 and 1.5 percent in 2011. This percentage varied among industries and was higher for companies that engaged in activities associated with an above-average risk of compensable harm.

Mealy additionally identified the rising premiums as a “significant factor” regarding a small decline in the underwriting expenses of private carriers that offered workers’ compensation insurance. He also referred to improved returns on the carrier’s investments. This suggested that increased revenue, rather than decreased expenditures, primarily impacted the private carriers’ fiscal health.

Lost-Time Claims Frequency

The presented statistics regarding lost-time claim frequency were based on the numbers from NCCI states and state funds. Although the adjusted result of a four-percent decrease in lost-time claims between 2010 and 2011 seemed to be good news, the decreases were generally more significant in the 1990s and early 2000s. For example, the decrease was 9.2-percent from 1992 to 1993 and 6.6-percent between 2004 and 2005.

The observed trend was that the number of small time-loss claims decreased more rapidly than other types of workers’ compensation claims going into the recession and that the quantity of small claims increased more rapidly during the economic recovery. The scope of this analysis did not include the average amount of lost time per claim.

Mealy described the average severity of compensable harm as “still rather modest” and reminded the audience that overall economic and the job market improvements prompted increased claims for relatively minor incidents.

Medical Costs

The finding that the average per-claim medical cost increased 4-percent between 2010 and 2011 was consistent with the wide-spread concern of employers and insurers regarding that expense. The average expense was $26,900 in 2010 and $28,000 in 2011. This amount was $8,100 in 1991.

Workers’ Compensation Residual Markets

The 2011 premium increase that the workers’ compensation residual market experienced was the first one that that segment experienced since 2004. Mealy described that sector of the workers’ compensation market as “a market of last resort” and stated that the $500 million that those insurers collected in premiums was good news for the rest of the workers’ compensation industry.

The logic was that the workers’ compensation community does not “want residual markets to burden the voluntary workers’ compensation market by making the voluntary market absorb the residual market’s losses.”

Final Thoughts

Better economic conditions increase employment levels and employee assertiveness.

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