Workers’ Comp Is Doing Great. But That Doesn’t Mean We Can Ignore the Risks Our Line Still Faces

The U.S. workers’ compensation system is strong, resilient and healthy, and it’s currently the best-performing line of property-casualty insurance.

The data tells the story: Take a look at these data points from NCCI’s recent State of the Line Report:

• Eight consecutive years of underwriting profitability, with a 2021 calendar year combined ratio of 87.
• In 2021, the average severity of indemnity and medical lost-time claims was unchanged relative to 2020.
• Lost-time claim frequency data suggests the long-term decline has continued despite a rise in frequency in 2021.
• Workers’ compensation reserves grew to $16 billion redundant as of year-end 2021.

However, skepticism remains.

The last few years have changed the workforce, with potential impacts to workplace injury frequency. The shift to remote work is expected to persist, putting downward pressure on frequency. This is being offset by an increase of short-tenured workers, which tends to increase frequency, especially in certain industries.

After we shared our State of the Line results, one industry veteran asked me, “Why are you so positive?” Another wondered, “Do you really believe all of those numbers?”

As an optimist, it is tempting to swat away questions like that. But I’m also a realist who has seen the workers’ compensation industry ebb and flow for decades. The industry is in a strong position today, but there are no guarantees about tomorrow.

With that in mind, let’s look at some of the concerns and the risks ahead for workers’ compensation, including long-term COVID-19, wage inflation, medical inflation, and a recession.

Long-Term COVID-19 Risks

First, COVID-19 remains a downside risk given the unknowns of long COVID.

In NCCI states, we have seen about 60,000 claims related to COVID-19 since the start of the pandemic, with about $500 million in losses.

We are just beginning to understand the implications and costs of long COVID. And while it doesn’t appear that long COVID will have a major system impact, we are conducting in-depth research now to understand this unique risk.

The Impact of Wage Inflation

Wages are rising at a faster pace than we have seen since the 1940s. According to the Federal Reserve, we are at full employment today, with an unemployment rate at a remarkable 3.6%.

There just aren’t enough workers to fill all the job openings. In fact, right now there are roughly two openings for every unemployed worker. This is driving up wages as employers pay more to recruit talent.

For workers’ compensation, this is not a major risk. Payroll is an effective exposure base because it is inflation-sensitive.

As wages rise, premiums automatically rise along with workers compensation benefits. Wages, premiums, and indemnity benefits, therefore, typically stay in relative balance. NCCI’s ratemaking process addresses other benefit changes that may be greater or lesser than wage inflation.

Nightmares About Medical Inflation

The headline numbers on consumer price inflation are eye-popping — the consumer price index rose to 9.1% in June compared to a year ago.

It conjures up vivid images from 20 years ago of rapidly rising medical costs in workers compensation, running at double the rate of consumer prices. But that isn’t the case today.

As our NCCI team recently reported, medical costs in workers’ compensation have risen at an annual rate of 2% for the past decade. Our most recent data shows drug costs are declining, physician costs are up slightly, and facility costs are rising.

Prices matter, as does utilization. Fee schedules and provider networks are constraining the growth of medical costs in many states.

So, despite the dramatic headline numbers for consumer prices, workers’ compensation medical trends have been moderate, and the forecast remains for them to stay relatively moderate in the near future.

Threat of Economic Downturn

The most unpredictable risk is the threat of recession.

In a May survey by The Wall Street Journal, the average estimated probability of a recession within the following 12 months was 44% among responding economists.

Rising interest rates in the United States, the slowing Chinese economy because of lockdowns, and uncertainties about Russia’s invasion of Ukraine have combined to create greater recession risks.

The Outlook

The threats on the horizon for workers’ compensation are real. We are in the business of risk, and the nature of risk changes all of the time.

The system is healthy today, but as we saw with COVID-19, the world can change dramatically in a matter of days and weeks.

So all of us in the workers compensation industry need to remain vigilant. At NCCI, we continue to closely track shifts in shifts in frequency, severity, and medical costs. We’ll share our findings in a timely manner, so stakeholders can make informed decisions.

Today, we can feel confident about the health and vitality of the workers’ compensation system. We will continue to look ahead, so we can maintain a robust system and fulfill our commitments to injured workers and their families. They’re counting on us. &