Workers’ Comp Bureau Loss Costs Continue to Trend Downward

In recent years, workers’ compensation insurance has seen notable decreases in bureau premium levels, driven mainly by declines in loss costs, which is the portion of premium allocated to indemnity and medical costs, according to an analysis by the National Council on Compensation Insurance (NCCI).

The trend of declining loss costs is due to inflationary pressures on payroll, especially in the wake of the pandemic, as well as long-term declines in claims frequency, the NCCI notes.

Despite these decreases in loss costs and payroll, total workers’ compensation premium has mostly increased, with observed periods of premium decline typically coinciding with recessions.

Payroll, as the exposure base for workers’ comp premium, is inflation sensitive and usually increases from year to year, according to the NCCI. After the pandemic, wages increased substantially in 2020, 2021 and 2022. The growth in payroll, influenced by the combined effect of wages and employment, has offset some loss cost and rate decreases, contributing to premium increases, the report explains.

“The goal of ratemaking is to ensure that premium covers costs, which can be measured by comparing the portion of premium allocated to losses with the losses themselves,” the report’s authors stated. “Recently, costs have been increasing slower than wages, resulting in loss cost decreases.”

Claim frequency, a major driver of costs, has been on a long-term downward trend.

“The workers compensation system has benefited from continued automation with the introduction of more advanced safety technologies in the workplace. Some risky tasks that were formerly completed manually are now automated, which has the effect of reducing the risk of workplace injuries,” the report noted. “Furthermore, there has been an increased emphasis on loss prevention, with employers implementing safety programs that address potential hazards aimed at reducing frequency of workplace injuries.”

Claim severity trends, measured by average claim costs, have been influenced by factors like the flattening of claim costs since 2009 and a decline in relative frequency of large claims.

Medical severity has been moderated by a number of factors, including medical fee schedules, drug formularies, reduced opioid use, and a reduction in major surgery.

Indemnity severity has mostly tracked wage inflation since 2017, the report noted. The combined impact of frequency and severity has led to consistent decreases in medical and indemnity loss ratios, driving bureau premium level declines.

Continued workers’ compensation experience improvement has been driving loss cost changes, with the loss ratio trend used to project historical loss ratios being a key component. Moderated severity changes starting in 2009 took time to understand and have confidence in, as historical policy years used to project loss costs take time to mature, the NCCI noted. More recent loss ratio trends have continued to decrease, requiring lower trend selections.

The COVID pandemic came with many uncertainties and challenges related to the “predictiveness” of the data from this period, the NCCI said, with cautionary measures employed in evaluating initially reported 2020 data and uncertainty around the duration of varying recession conditions by state.

After the pandemic, workers’ compensation experience has continued to improve, with 2020 loss ratios continuing decreasing patterns in most states and 2021 and 2022 demonstrating further improvement. Pandemic-related employment factors, such as the shift to remote work, reduced travel, and shifting job duties with less person-to-person interaction, may have led to lasting workplace safety improvements. Additionally, recent wage increases have significantly outpaced medical inflation in the workers comp system.

As NCCI continues to monitor factors influencing workers’ comp premium level changes, the organization remains committed to evaluating any early signs of shifts or changes to ensure they are accounted for in the ratemaking process, the report’s authors said.

To view the report, visit the NCCI website. &