Workers' compensation underwriters are about to be tested in the marketplace like never before.

While the current situation is not all because of the pandemic, the pandemic has "put gas on a fire that was already burning," according to a new report that notes workers' compensation loss costs have been on a downward trend for years and expense ratios have been climbing.

The report, Workers' Compensation Industry Trends, from cloud-technology firm Insurity, identifies several key trends including a decrease in new business, stagnation of renewals, expected premium loss and low investment yields that workers' compensation insurers need to address in order to "protect and preserve loss ratios while competing for premium in the current and post-pandemic marketplace."

"One thing is clear: the convergence of all these trends will push the impact of this pandemic well into 2021 and possibly beyond. In the end, 'business as usual. will not cut it. Success will hinge on a level of underwriting excellence not previously tested until today," the report concludes.

The report says carriers must do a better job of pricing and selecting the right risks going forward while also finding ways to lower their expense ratios.

The report is based on an analysis of second and third quarter data from the Valen Data Consortium, a proprietary database of property/casualty policy, claims, billing and submission data, totaling $100 billion in premium ($60 billion in workers' comp premium). It contains more than 20 years of workers' compensation data. The report looks at the pandemic's impact on quotes, renewals and pricing.

The authors stress the importance of the data being used when analyzing what has been happening during the pandemic.

"Insurers may look at their books today and think they're in a better funding situation than they actually are. That's because their underlying data is not reflective of the actual payroll/exposure, meaning a significant amount of premium may need to be returned upon audit. This will extend the impact of this pandemic into 2021 and beyond," said JJ Ihrke, head of analytics and chief scoring officer at Insurity.

The trends show insurers under pressure from three key forces: a decrease in new business; renewal stagnation; the potential return of substantial premium resulting from retrospective audits reflecting layoffs and furloughs during the pandemic, and low investment yields.

New Business

New business submissions for all industries in the second and third quarters of 2020 were down 10% from 2019, with arts, entertainment and accommodation industries falling even more, 23%, and public administration and other services also down considerably at 17%, according to the report.

The owners of many of these businesses were likely too pre-occupied with other matters to take time to shop for insurance, suggest the authors. They remind insurers that new business is harder to find, underwrite and price in a pandemic and thus insurers should consider "turning their attention to new ventures and market segments that can support new business" and look to data analytics for help in competing in new markets.

"With new business quotes down as much as 23% in some industries, underwriting profitability becomes incredibly important to achieve because insurers simply can't afford to miss on the scarce new business opportunities available," Ihrke said.

(There has been a surprising surge in U.S. business startups in the last half of 2020. After falling by 30% in the weeks following the March lockdowns, according to a U.S. Census Bureau, new businesses filings started growing in June and finished the year ahead of 2019's tally by almost a quarter. Overall, the nation saw about 600,000 more business applications through early October than it did in the same period in 2019, and almost 200,000 of those were in online retailing, according to a breakdown by the U.S. Census Bureau.)

After cratering by 30% in the weeks following the March lockdowns, paperwork filed by prospective businesses started growing in June and finished the year ahead of 2019's tally by almost a quarter, according to a U.S. Census Bureau analysis of federal tax documents.

It was the highest annual total on record, according to John Haltiwanger, an economist at the University of Maryland.

The upswing in entrepreneurship comes against the backdrop of mass closures of established small businesses as the coronavirus lockdowns shuttered shops and kept people at home. The National Restaurant Association estimates that 17% of U.S. restaurants -- or about 110,000 establishments -- have closed either permanently or for the long term.


Policy renewals in September 2020 were 97% of what they were in September 2019, according the Valen data. The report cautions that while steady retention rates are a good thing, in this case they may be a sign of businesses not shopping during the pandemic and not a sign of what's ahead.

Also, policies were likely being renewed at current rates give that the data shows payroll were consistently flat from pre-COVID levels.

Steady payrolls could be misleading, the report notes, because retrospective premium audits could reveal "significant decreases in payrolls" after the pandemic, resulting in insurers needing to return large amounts of premium to insureds.

Premiums Decline

Declining loss costs and competitive pressures have prompted insurers to continue cutting premiums despite payrolls holding steady. Insurity research conducted in 2019 with McKinsey & Co. showed that National Council on Compensation Insurance loss costs rate for the 10 most common class codes have fallen on average 21% over the 2013-2018 period.

"Given that the impacts of the pandemic will be felt well into 2021, and combined with falling loss costs, insurers can expect to face a lack of premium adequacy funding for the foreseeable future. This again emphasizes the criticality of risk selection and pricing to enhance competitive differentiation and enter new ventures and markets," the report warns.

Low investment yields is another trend that is compounding the challenges.

"With investment yields impaired and the dramatic effects of the pandemic putting insurers' books at risk, improved risk selection and pricing is now paramount for underwriting profitability, the report says. Workers' compensation insurers could be particularly affected if COVID-19 legislation in some states increases loss severity for certain industries such as frontline healthcare workers.

Six Steps

The full report lays out and explains six steps underwriters can take to address the challenges ahead:

  • Improve the precision of risk selection and pricing.
  • Look for operational efficiency gains.
  • Leverage third-party data and data consortiums.
  • Gain a contextual view of risk.
  • Know what is being insured and actively manage it.
  • Tap into ecosystems to quickly implement solutions.

"Time is of the essence. Insurers cannot wait to understand the impact of this pandemic on their portfolios. They have to shift gears now—pricing and selecting risk with a new level of precision, implementing loss history models that accelerate growth in new markets, understanding COVID hotspots and accumulations of risk— and especially, being able to manage risk in real time," the authors advise.

Source: Workers Compensation Industry Trends report