Workers’ compensation continues to be the shining star in the property/casualty insurance market. Despite a 9% decline in direct premiums written to $44.3 billion, and a combined ratio in 2020 (91.1%) that was just a few points higher than 2019 (88.5%), the workers’ comp line overall remains profitable, outperforming all other lines in the P/C market.
There are concerns percolating in the background over the future of workers’ comp, according to some experts. Labor shortages, rising costs due to social inflation and medical inflation, remote work, and a rise in mental health concerns are a few of the industry’s worries.
Workers’ compensation rates have been trending down for years as a result of a decline in frequency and a stronger focus on safety in the workplace, according to Mark Wilhelm, chairman and CEO of Safety National, a specialty insurance and reinsurance company, and a member of Tokio Marine Group.But there are pressures and unknowns on the horizon due to today’s economic environment and how risks from the pandemic might unfold, he added.
“We’re in an era now of less certainty in workers’ compensation,” according to Wilhelm.
There’s more risk from changing workforce trends and a threat of increases in claims frequency, he believes.
“We’re going to witness an increase in frequency and an increase in severity, as well, because of just people being overworked from so many industries seeing labor shortages today,” Wilhelm said. Somebody’s making up for those labor shortages and that’s leading to overworked employees, he said.
When new hires do enter the workplace, they may not be getting the training they need. “We’re certainly going to see an increase in frequency and consequently severity, and costs” ahead, he said.
That’s one of the risks with the changing workforce the U.S. is seeing today — the potential pressure on frequency due to newer hires and inexperienced workers, says Rick Poulin, vice president, business insurance, workers’ compensation product, at Travelers.
Travelers tracks newer workers and their increased exposure to workplace injuries. According to a recent analysis of Travelers’ indemnity claim data from 2015-2019, 35% of workplace injuries occurred during a worker’s first year on the job. “These first-year injuries resulted in more than six million lost days of work, representing 37% of all lost days,” Poulin told Insurance Journal.
The Travelers study also found the most common causes of first-year injuries were: overexertion (27% of claims); slips, trips and falls (22%); struck-by injuries (14%); cuts and punctures (6%); caught-in or -between hazards (6%); and motor vehicle accidents (6%).
“Our data shows that workers in their first year on the job account for a disproportionate number of workers’ compensation claims compared to workers with a year or more on the job,” Poulin said.
Jennifer Cogbill, senior vice president, GBCARE Client Services, at Gallagher Bassett, a global provider of risk and claims management services, agrees. The “Great Resignation” and the ongoing disruption of the pandemic have led to a greater share of new employees, some of whom may have received less robust on-the-job training, she told Insurance Journal.
“When we look at claim severity, it is often tied to employees with less experience,” Cogbill said. “Coupled with fewer employees working longer hours to accomplish tasks, this again increases the risk of claims due to fatigue or lack of supervision.”
Risk management becomes especially important when there is so much change in the workforce, Poulin added. “It’ll be very important for insurers and agents to work with employers, utilizing risk control services and other means to better train new employees and minimize the potential for injuries that more experienced employees are less likely to experience.”
Competition in the market remains healthy, despite the risks being generated by a changing workforce.
“For almost 10 years we’ve seen rate reductions in many states across the board,” said Pat Edwards, senior vice president and workers’ compensation practice leader, at Risk Placement Services (RPS), an E&S wholesale broker and managing general agency. Edwards noted that rates are at 40% to 60% off where they were eight to 10 years ago.
“We have the largest casualty line by premium on the street that is performing at this level.” That’s driving more carriers to jump in. “We’re seeing more comp carriers in the standard sector that are branching out and doing things that traditionally they haven’t done before, like getting more aggressive in the specialty comp space, for example,” he said.
Edwards said while the calendar year combined loss ratio has been very favorable in workers’ comp, that’s a lagging indicator, suggesting things aren’t looking quite as bright as they did. “Some jurisdictions are beginning to see annual loss ratios over 100 and so that’s creating a little bit of angst,” he said.
Competition has been especially tough during the past 15 years, according to Emilio Figueroa, chief insurance officer at Foresight, a workers’ comp insurer focused on workers comp coverage for construction, manufacturing and agricultural business.
Figueroa contends that now is a good time to grow as rates seem to be stabilizing for the line. Foresight, which is currently underwriting in eight southwestern states, plans to expand further into the southeast and northeast this year.
“We’ve seen rate decreases across the board on a national basis … but as we come out of the pandemic, things are not only becoming more stable on a social sense, but also for the insurance line. Workers’ comp is stabilizing,” Figueroa maintains.
California is one of the first states showing signs of a significant rate increase ahead. On April 20, the Workers’ Compensation Insurance Rating Bureau of California authorized the WCIRB to submit a Sept. 1, 2022, pure premium rate filing that is on average 7.6% above the average approved Sept. 1, 2021.
“That’s probably the first significant increase I’ve seen in quite some time,” Edwards said. “And usually California tends to lead the way — it’s 24% of the U.S. workers’ comp market, so that was big.”
Edwards says the upcoming National Council on Compensation Insurance (NCCI) State of the Line report expected to be released on May 10 will also paint a picture of what’s to come in workers’ comp rates in 2023.
“That’s going to be big. I’m looking to see what their view is as to how the line is holding and the accident year loss ratio’s inflation,” he said.
Safety National’s Wilhelm has a lot of questions about the market and what comes next.
“The overall question is, have workers’ compensation rates finally bottomed out?” he asked. “Is the reserve redundancy in workers’ compensation going to be gone? It’s been trending down for the industry. We’ve been charging less premiums, and eventually that catches up with you, especially in a situation now where frequency might be spiking,” he said. “But then again, there’s investment income ticking up, and that helps the carrier with responding to increases in cost.”
U.S. economic inflation is roaring back, Wilhelm added. “Inflation’s been very stable in workers’ compensation for a lot of years, and now you have social inflation as well as economic inflation, and both of those have an impact on workers’ compensation.”
Will carriers recognize their costs are going up? “I think they will eventually, but how quickly will they realize that? Premiums rise with payrolls. Yes, but is it enough considering all the cost drivers out there?”
Even with all these unknowns, Wilhelm believes it might take the market a little time to see rates and premiums finally start to go “the other direction.”
“Since workers’ compensation is a long-tailed line and claims can remain open for years, we have to be very mindful of medical inflation,” Travelers’ Poulin added.
It’s been a bit of an oasis for years for workers’ comp insurers, Wilhelm noted. “That is where we were making money. Well, that’s possibly changing.”