Can Workers’ Comp Premiums Remain Favorable in the Face of Inflation?

Gallagher’s latest Spring/Summer market report reveals that while market conditions have begun to stabilize post-pandemic, significant challenges remain. Gallagher predicts that rates will continue to moderate in most lines throughout 2022, with workers’ compensation a notable exception.

Despite recent profitability and a calming flow of COVID claims, workers’ comp should expect macroeconomic factors to drive claim costs even as other lines transition to rate adequacy.

“We had some positive outcomes in the workers’ comp line over the past couple of years, but there are also headwinds,” explained Ania Caruso, regional SVP and casualty practice leader with Gallagher.

“It’s coming from the aging workforce, and it’s also coming from the economy and inflation. Medical cost inflation, but also the advancement in medical technology that can contribute to rising severity. Macroeconomic inflation is putting pressure on medical cost inflation and the cost of medical care.”

The report notes that rates have been low for workers’ compensation for several years, with a 0.6 percent median rate change in Q1 2022. However, Gallagher predicts that the workers’ compensation market could be hardening as employees return to work in the endemic stage of the COVID pandemic.

With this return comes the risk of claim frequency increases, due to inexperienced employees. A University of Tennessee study bears this out — researchers found that in the two-year study period, 44.5% of injuries were sustained by those on the job less than a year. And when injuries occur, they are more expensive to treat now than ever before. Inflation, of course, plays a role, but so too do new technologies. A study published in the National Library of Medicine found that health care technology costs are rising. And unlike in other industries where price tags reduce as new tools become commonplace, med tech costs continue to rise.  

“The workers’ comp industry over the last five years has been very profitable. But when you have access to the technology we have right now, when an injured employee brings in a claim and gets treatment, that might open Pandora’s box,” Caruso explained.

Population Trends an Ongoing Factor

Further, Caruso notes, the aging workforce is likely to cause issues in the short and long term.

“When you have an employee age 55 and older, the severity of the claim doubles, often driven by pre-existing conditions,” Caruso said. “Our society will continue to age, however, birth rates are experiencing a downward trajectory. And you’ve got employees who are working longer due to economic stressors that may be delaying retirement.”

Ania Caruso, regional SVP and casualty practice leader, Gallagher

Recent analysis from The Brookings Institute regarding 2020 birth rate data indicates that the U.S. is now well below the replacement rate of 2.1 (without immigration) and is not likely to rebound, unless there are changes in the trend where women have the same number of children, just later in life. This, according to Brookings, is unlikely to be the case.

As Caruso indicated, this decline in births is coupled with the aging workforce and delayed retirement due to larger macroeconomic factors.

A November 2021 The Economics Daily (TED) issue from the Bureau of Labor Statistics noted that, “among people aged 75 years and older, the labor force is expected to grow by 96.5% over the next decade.” This is contrasted with the percentage change of 53.7% in this age group of the civilian labor force between 2010- and 2020.

Changes in how this aging labor force works will also affect the overall picture for workers’ compensation, a line of business for which technology investments are finally starting to pick up steam, as they are in other parts of the insurance industry.

The report identifies how carriers’ continued investment in data and technology will change risk trend tracking as an area Gallagher is watching in the workers’ comp space, especially as work from home changes the auto risks coupled with workers’ comp.

“Insurance is very retrospectively-looking. Investments in data analytics and real-time analytics will allow the carriers to be more reactive and that translates into premiums being impacted in a positive way for the client,” Caruso explained.

“With the investment in analytics, they have real-time access to information and the carriers are able to adjust the pricing, very similar to what we already have in personal and auto lines, where you have a pay as you go approach. The commercial carriers are looking into understanding if the client has dramatically switched from an office exposure to a work from home structure, workers’ comp exposure has diminished.”

That pay as you go model and its ability to be implemented will change the audit process and everything with it, as it’s adopted by more carriers. “This will also show us the claims trend much quicker. On the carrier side sometimes there are a lot of silos when it comes to data, but now there’s a push toward predictive analytics and translating the data into actionable underwriting information.”

Work from home trends are also likely to reduce auto liability, but the overall link between auto and workers’ comp is complicated by safety concerns among those who drive for work. “One of the loss drivers in comp is still coming from auto accidents,” Caruso said. “There’s a lot of distracted drivers and there continues to be pressure on the auto liability line of business that is closely correlated to the workers’ comp line of business.”

Other key findings from the Gallagher latest Spring/Summer market report include: average property rate increases dipping into the single-digits, concern in the general liability space about the impact of third-party litigation funding and the impact of social inflation, nuclear verdicts concerns for Umbrella/Excess markets, semiconductor chip shortages and supply chain disruptions in Auto, and amplification of environmental, social and governance focus plus diversity, equity, and inclusion issues in MLP and D&O lines.

The key trend observations in the Gallagher report will be discussed in future market reports. Access the report here. &