While the climate surrounding workers’ compensation remains in flux with the uncertain economy, some disconcerting trends have been noted in the 2012 NCCI Workers’’ Compensation Issues Report.
The most disturbing development is that claims frequency increased for the first time in 13 years.
An analysis by the National Council on Compensation Insurance showed that the frequency of lost-time claims for each $1 million of premiuim went up by about three percent in 2010. The reason for the uptick in new claims may be that there were more lost-time claims that might have been only medical claims in a more robust economy.
But the report noted that the claims that are driving costs, especially medical claims, are still there. Moreover, medical costs, without the shift in claims to lost-time, are still probably increasing faster than the medical consumer price index, which has been going on for a number of years.
The report called the three percent increase an area of significant concern. NCCI will be monitoring the numbers closely to determine if it is only a short-lived phenomenon or the beginning of a longer-term trend.
Although more optimistic about the workers’ compensation outlook now than six months ago, NCCI officials said there are several causes for concern.
One concern is the deteriorating state of underwriting results. The report noted that because investment returns are now at historic lows, the current levels of underwriting losses are not sustainable.
As noted in the report: “Even with what appears to be a temporary increase in investment gains, the combined ratio needs to decline substantially to earn a reasonable return on capital.”
Another problem is the uncertain claim frequency. It is uncertain whether the increase in 2010 is a permanent change or just an aberration brought about by the recession.
The political environment is also a concern, especially with 2012 being an election year.
Other factors affecting workers’ compensation include the lack of employment growth. This will in turn dampen the rate of claim frequency and exposure. Wage growth also will be a key factor going forward, since average weekly wages are important in determining the severity of indemnity. Again, because of the unemployment situation, which works to hold down wages, the growth of indemnity severity should be slow. In fact, the report notes that wage inflation is not a concern at this point. Premiums are tied to wages as well, so this may offset any negative effect on indemnity severity.
Additional influences that also might affect the operation of the workers’’ compensation system include premium growth and medical inflation. The report forecast that premium growth should adhere closely to payroll growth and pricing in 2012. Medical inflation is expected to increase faster than the general inflation rate and will continue to put upward pressure on medical claim costs.
The report also noted the following trends:
- After six years of decline in the residual market (aka, “market of last resort” or “the pool”), NCCI is seeing initial signs of an increase.
- Direct written premium is showing some growth.
- State results show deterioration, with the ratio of increases in loss costs to declines doubling in just two years, a trend that is expected to continue in 2012.
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