Premiums Impacted by Wage Growth
The stock market may rise, unemployment drop, the dollar soar, but the one economic indicator that has perennially baffled economists and politicians alike has been wage growth relative to economy-wide productivity.
According to this year’s NCCI report, however, wage stagnation which began in 1973 is relaxing a bit. Average weekly wages should increase by 3.4 percent this year, it predicts, accelerating to 4.8 percent growth in 2018. That, say some, may have a direct impact on workers’ comp premiums.
“Yes, you’re going to get more premium,” said Dan Hair, Chief Risk Officer, senior vice president, Safety and Underwriting for WCF Insurance, though in the current economy it’s being driven, he believes, by the addition of new employees rather than salary growth.
“It generally correlates with a robust economy, which we certainly have here in the inner mountain west. But it’s growth in certain types of industry, particularly construction.”
Adam Doyle, an underwriter at BITCO Insurance Companies agrees. Increased construction activity has been felt in the 10 states in which BITCO underwrites, especially Pennsylvania, West Virginia, Ohio, Delaware and Maryland. Doyle “loves” higher payrolls.
“But it’s not like a rate change; you simply get more premiums which is nice and obviously good for the economy.”
Along with increased average wage growth in construction naturally comes higher indemnity severity. “Indemnity case severity has basically been increasing the last five to 10 years, even during the recession,” said Hair.
For his part, Matthew Zender, VP and product manager for AmTrust North America, disputes part of the premise. Yes, wage growth often correlates to an increase in indemnity severity, but is not always the sole contributor, he said.
Employment growth “tends to achieve a more direct line into indemnity severity,” said Zender. Newer employees “are generally less familiar with their job functions and surroundings and are much more likely to suffer a claim.”
But Zender also noted that increased premium tends to offset wage growth, citing a combined ratio 3 percent lower from 2007-2016 than during the years of 1995-2006 — despite increases in wage growth. “Clearly, if one had the ability to place the increase that is strictly attributed to new employees into a separate tranche, that business by itself would perform worse,” said Zender.
Zender’s numbers also show that while medical and indemnity costs continue to rise, the pace of their growth has slowed. From 1995 to 2001, medical costs jumped more than 72 percent; those increases dwindled to a little more than 14 percent between 2009 and 2016. That jives with Hair’s assessment of medical cost increases.
“Carriers are getting more sophisticated in their billing and their analysis. So that doesn’t surprise me. But the benign rate of medical inflation over the last few years, I just don’t see that continuing.”
To Zender’s comment that increased premium tends to offset wage growth, it all counts, adds Hair. “Whether it’s wage growth or medical inflation or whatever, it really does get incorporated into the rate-making process.” Regional differences on how wage growth impacts workers’ comp are also relevant, said Hair, including, among other things, litigation rates in states and regions.