Economic Downturn Presents Mixed Results for Workers’ Comp Market

The economic and financial downturn will have a mixed impact on the workers’ compensation insurance market, say industry analysts.

Harry Shuford, chief economist for the National Council on Compensation Insurance (NCCI), says recessions tend to place downward pressure on workers compensation exposure, which is primarily due to declines in employment and slower growth or declines in wage rates.

“During a recession, headcount is going down while the average weekly wage in all past recessions has continued to grow but at a much slower pace,” Shuford said at the recent Casualty Actuarial Society (CAS) Ratemaking and Product Management Seminar in Las Vegas.

Recessions also tend to place a downward pressure on workers’ compensation claim frequency by increasing the skill level of the workforce, he noted.

Shuford, who served as a CAS session moderator and panelist at the seminar, observed that the frequency of workers’ compensation claims has been falling steadily since the early 1990s and will likely continue to decline for the foreseeable future.

“In the first two of the three most recent recessions, claims frequency dipped dramatically. In the most recent recession of 2001 the downturn was already underway, and there was an increase in the rate of decline,” Shuford added.

However, one contradictory issue that underwriters and claims professionals often point out is that when a workers’ compensation client closes a plant, this leads to a surge in claims.

“This is a paradoxical result that frequency actually declines, when our anecdotal data says large lay-offs should result in increases in claims,” he said.

Shuford went on to note that the growth in indemnity severity eases during recessions, driven by the slowing of growth in wage rates. “The big impact on indemnity severity comes the year after the recession as the average weekly wage levels during the recession appear in the benefits structure.”

Meanwhile, growth in medical claim costs tends to increase during recessions though the growth will ease somewhat due to the decline in claims frequency, he said.

Shuford added that lower interest rates during and immediately after recessions means that property/casualty insurers as a whole will experience lower investment yields.

But he pointed out that the overall impact on property/casualty insurer returns may not be significant because “stocks are not a large portion of property/casualty portfolios.”

Frank Schmid, director and senior economist, National Council on Compensation Insurance (NCCI), noted that the growth rate of workplace injury and illness rates drops sharply during recessions and rises sharply during recoveries.

“Frequency growth bottoms out with economic activity, before rising sharply during the ensuring recovery. Going into recession, frequency drops by 2.5 percentage points; going out it will increase by 5 percentage points before reverting to its pre-recession level,” he said.

Schmid explained that these two effects are driven by slowing job creation during recessions and accelerated job creation during recoveries.

“Faster job creation is associated with an increase in the growth rate of workplace injury and illness incidence rate,” he said, adding that evidence provided by the Bureau of Labor Statistics relates the higher incidence rates to shorter job tenure.

Accelerated job destruction at the onset of a recession also increases the growth rate of the workplace injury and illness incidence rate.

According to Schmid, this finding is indicative of moral hazard or opportunistic behavior. “It is a widely held belief and anecdotal evidence shows that layoffs give rise to workers’ compensation claims that you would not see otherwise.”

On net, recessions tend to cause a decline in the growth of workplace injury and illness rates, he concluded, adding: “Similarly, on net, recoveries from recessions come with an increase in the growth of the workplace injury and illness incidence rate.”

Source: Casualty Actuarial Society