Insurance Tutor

Worker’s Compensation Claims Fall During Recession

LAS VEGAS –
At a seminar for ratemaking and product management held in Las Vegas held by the Casualty Actuarial Society (CAS), those attending were told that the economic and financial downturn will have a varied impact on the workers compensation insurance market.
The chief economist of the National Council on Compensation Insurance (NCCI), Harry Shuford, who served both as a session moderator and panelist, stated that recessions tend to place reduced pressure on the exposure of workers compensation programs.

This results from the factor that there are declines in employment, a slower rate of growth and possible declines in wage rates. Shuford says that during times of recession there are fewer employees accompanied by a slower growth in the average weekly wage. This he says has been the case in all past recessions, where wages have continued to grow but at a much slower rate.

Another factor to consider is that recessions tend to place downward pressure on the frequency of workers compensation claims since the skill level of the workforce tends to rise.

Shuford also mentioned that this has been the case since the early 1990s and adds that the frequency of workers compensation claims has been falling steadily and that they are expected to continue to decline for the probable future.

There is however, one other factor to consider and that is that often when there is a plant closing, this leads to a surge in claims.
Shuford sees this as being paradoxical in that there is a decline in actual claims, in spite of the fact that large lay-offs are occurring, which should result in increases in claims.

During recessions, according to Shuford, because of the slowing of growth in wage rates, the growth in indemnity severity eases off. He says that the greatest impact on indemnity severity comes the year following the recession at the time that the average weekly wage levels that occurred during the recession appear in the benefits structure.

At the same time, there is a tendency for a growth in medical claim costs during recessions but it is also evident that growth eases somewhat due to the fall in claims frequency, Shuford said.

Also the lower interest rates that appear directly following a recession means that lower investment yields will be experienced by property/casualty insurers as a whole.

But because as Shuford explains it, stocks are not a large portion of property/casualty portfolios, the overall impact on property/casualty insurer returns may not be all that significant.

The director and senior economist of the National Council on Compensation Insurance (NCCI), Frank Schmid, also noted that the growth rate of workplace injury and illness rates falls significantly during recessions while during recoveries, it rises sharply.

With economic activity, Schmid says, frequency growth bottoms out before rising sharply during the ensuring recovery. He notes that when you enter a recession, the frequency of claims drops by 2.5 percentage points. When the recession passes, claims increase by 5 percentage points before reverting to its pre-recession level.