Boca Raton, FL (WorkersCompensation.com) – Another year of underwriting gains, declining claim frequency and a strong industry reserve position should have been cause for celebration in the workers’ compensation industry. But the impact of the coronavirus has led the system into unchartered territory where it faces significant uncertainty. Still, the financial strength of the workers’ compensation line should give some comfort to stakeholders looking to the near- and long-term implications for the system.
“We have to be agile and respond. 2020 is a pivotal year,” said Bill Donnell, president and CEO of NCCI. “Workers’ compensation is being tested as never before. But we shouldn’t lose site of the fact that our system is strong and resilient.”
Donnell kicked off NCCI’s first ever virtual Annual Issues Symposium with a theme echoed by all the speakers; that the system is perhaps as well poised to handle a pandemic as it has ever been. Maintaining its strength requires vigilance, NCCI’s word of the year.
“It means we won’t get distracted,” Donnell said. “Vigilance is hard, it requires a lot from all of us. But it is critical to ensure we are there when workers and employers in our communities need us.”
“Our workers’ compensation system had another solid year and finished solid at the end of 2019,” Donnell said. The 2019 estimated numbers among NCCI states included:
- Calendar year combined ratio: 85 percent. The 6th consecutive year the system posted an underwriting gain.
- Accident year combined ratio: 99 percent, with expectations it will develop “quite favorably.”
- Claim frequency: down 4 percent on average from the previous year.
- Reserves: $10 billion redundant for private carriers.
- Total net written premium volume: declined to $47 billion.
- Accident year indemnity Severity: increased by 4 percent.
- Medical lost time severity: increased by 3 percent.
- Residual market pool premium volume: just under $1 billion, or a market share of around 7 percent
Workers’ compensation has had “steady and strong results,” said Chief Actuary Donna Glenn, in delivering NCCI’s State of the Line Report. “Not all lines have experienced that as workers’ compensation has.”
The COVID Factor
While ‘steady’ and ‘strong’ described the workers’ compensation system as of end-of 2019 results, terms such as ‘extraordinary’ and ‘unprecedented’ were used to discuss the pandemic and its impact.
“COVID-19 has shocked the workers’ compensation system,” Glenn said. “Almost overnight some workers find themselves on the front line while others began telecommuting. Statistics are changing by the day. We expect almost every aspect of workers’ compensation to be impacted. Nevertheless, the system is strong and designed to support workers and employers. We’re all in this together.”
Recessions typically put downward pressure on claim frequency, as employment shrinks and newer workers have their hours reduced. However, the percentage of claims often rises at the end of recessions.
Industries such as leisure, hospitality and travel are seeing decreases in employment, but there is a strong demand for healthcare workers and those associated with grocery stores and home delivery.
“Make no mistake: the shutdown cuts deep,” Glenn said. “The dramatic drop in income will push down premiums, with reduced workers’ compensation exposure. Small businesses will be especially hit hard. They typically have first-dollar coverage, expect premiums to fall faster than overall employment.”
The limited data available for COVID-19 related claims makes it difficult to issue projections. But there are “clearly some pressure points” that will affect the system. “Workers’ compensation written for COVID-19 for first responders [and others] will see a spike in frequency and severity,” said Robert P. Hartwig, clinical associate professor of Finance at the Darla Moore School of Business at the University of South Carolina. “Many states will also force coverage for [workers who] quarantine.”
The rapid slowdown in the economy may hit workers’ compensation harder than most, if not all insurance lines in the property/casualty industry.
“At the end of the day COVID exposures will be vary substantial,” Hartwig said. “But these risks are manageable.”