Inflation Is Hitting Consumer Prices Hard. Here’s Why Workers’ Comp Hasn’t Felt It — Yet

By: Matt Zender | August 21, 2023

Matt Zender is senior vice president and Workers’ Compensation Product Manager for AmTrust Financial Services, one of the top workers’ compensation carriers in the U.S. At AmTrust, he manages the WC Product line and strategy. He has been in the industry for over 25 years and is active in a number of committee and board positions of thought leaders and bureaus throughout the country, including CWCI, NCCI and NYCIRB.

For the past few years, inflation has impacted all of us as we shop for food at the local grocery store, eat at restaurants, fill our gas tanks, buy new cars and look for a new home.

The inflation rate, topping off at 8.5% a year ago, has not dramatically impacted workers’ compensation — yet. This is due to medical inflation staying at a lower rate than overall consumer inflation.

Why hasn’t medical inflation spiked as much as consumer inflation? How do these numbers impact workers’ compensation? And will it lead to changes in the final rates charged to policyholders?

The high consumer inflation numbers were the result of many factors, including an overheated economy due to COVID-19 stimulus money, post-COVID-19 recovery, supply chain issues and labor shortages. Higher energy costs are the largest category impacting the CPI, affecting the costs of vehicles, food and shelter. However, there have been positive signs, as we saw in the May 2023 Consumer Price Index (CPI) report, which showed that the inflation rate (4%) had cooled down to the lowest rate in two years.

How Does Inflation Impact Workers’ Compensation?

Inflation and other macroeconomic factors impact the insurance industry, perhaps no line more than workers’ compensation. While social inflation isn’t currently prevalent in the system, inflationary trends in wages and medical directly affect profitability in the line. Additionally, there are trend factors that can serve to amplify these effects, including frequency and medical and indemnity severity.

The COVID-19 pandemic saw very large payroll swings. In many respects, the easiest way to evaluate the trend lines is to focus on 2019 to 2022. For example, using U.S. Bureau of Labor statistics, 2022 saw a payroll increase of 9.9% over 2021. In this year-over-year view, wages (what folks are getting paid) went up 4.8%, while employment (how many folks are working) went up 4.9%. That is fairly balanced.

For comparison, when we look at 2019 to 2022, we see a payroll increase of 22.1%. However, this is mostly wage growth (20.1%) versus employment growth (1.6%). The employment growth view of 2022 versus 2019 demonstrates how tight the labor market is right now, with unemployment figures near all-time lows.

Medical Inflation’s Impact on Workers’ Compensation

Medical inflation in workers’ compensation has been relatively moderate for the past 10 years. Still, the food, shelter and energy inflation numbers of the past two years have raised concerns that medical inflation would rise at similar levels. Thankfully, medical inflation is usually more stable and moves more slowly, so the numbers did not increase when consumer inflation rose last year.

Medical inflation is split into services (including facilities and physician care) and commodities (including drug costs and medical equipment). The medical care services numbers carry a higher weight (at 80%) in the overall medical inflation numbers.

In the May 2023 CPI report, medical services inflation dropped to -0.1%, well below the overall average. A decrease in health insurance drove this number. Overall, the remaining medical services are at 2.2%. The physicians and related services’ inflation number dropped to 2.0%.

Removing health insurance, medical inflation is 2.6%. The main drivers of medical inflation are nursing home/invalid care and dental and inpatient hospital care.

The medical commodities inflation figure is 4.4%, led by nonprescription and medical equipment costs. Prescription drugs are the most significant portion of that total number at 3.1%. This number reflects a level of cost controls on pharmaceuticals present in health insurance and workers’ compensation.

Workers’ compensation state fee schedules are often tied to Medicare, which often lags behind the actual changes. Workers’ comp costs could go up after the CPI number drops. Currently, workers’ comp medical costs are running well below the medical CPI, but the commodities number is concerning.

Factors Driving Medical Claim Costs

According to an NCCI report, workers’ compensation paid costs increased by 1.5% annually between 2012 and 2019. Due to the COVID-19 pandemic, there was a dramatic drop in new workers’ comp claims. A drop in the denominator like this will often realize an increase in severity, as smaller claims don’t make their way into the system. Despite this, in 2021 medical cost per claim rose only 2%.

As with the medical inflation numbers, two factors drive changes in medical claim costs: the price of medical services and utilization, which measures the mix and number of services provided to an injured worker. Physicians, facilities, drugs and other services contribute to workers’ comp medical costs. Overall, drug costs are declining (mostly driven by opioid reforms), physician costs are up slightly and facility costs are rising in the workers’ compensation system.

The average physician paid cost per claim grew moderately from 2012 to 2021 at about 1.5% per year. Physician service prices increased, which was the primary driver of growth in costs across the U.S. Change in utilization was the principal contributor to shifts in costs of surgeries and physical medicine services; surgery use decreased, while physical medicine use increased.

During the first year of an injury, facility and physician costs make up the largest share of the treatments. These services diminish over the next few years as prescription drugs and physical medicine take over as potential treatments for the injured worker. Therefore, claims at different stages of the injured worker’s recovery will have different pricing.

Facilities were the most significant contributor to workers’ compensation medical cost changes. The changes in medical facility costs reflect the amount paid per visit and the number of visits per claim. The facility-paid cost per claim grew 3.3% annually, and hospital outpatient services were the most prominent contributor to the increase in facility costs.

While the number of inpatient visits decreased by 3% per year, the number of surgery visits to ambulatory surgical centers grew. Within each facility type, the amount paid on any individual visit can vary depending on the type of service performed during the visit — such as surgery, ER or imaging.

Guarding the Workers’ Compensation Market Against High Inflation

Unlike the generally untethered impact of inflation on items such as milk, the workers’ compensation industry does have some guards against runaway inflation, including:

Regulated fee schedules
Carrier-negotiated fee schedules
Contractual agreements with service providers
Settlement opportunities

Nonetheless, inflation is a key metric that deserves careful review. Inflation in wages should usually have a relatively linear impact on the premium, as payroll is the exposure base from a rating perspective. Changes in medical inflation, however, will be left for the individual carriers and bureaus to evaluate and determine the appropriate response. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

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