Loss Cost Components and Industrial Structure
Motivation. Concomitant with the 2007-2009 recession, the U.S. economy experienced profound changes in industrial structure that led to widely varying growth rates of employment by industry. Whereas some of these changes may be temporary, others are likely to be permanent or keep progressing. Among the sectors exhibiting the most significant shifts in employment levels are manufacturing, health care, and construction. Quantifying the impact of the changes to the industrial structure on loss cost components is important for understanding trends in NCCI aggregate ratemaking.
Method. A statistical model is employed to measure the impact of the rates of employment growth by industry and the change in the rate of private nonfarm employment growth on the growth rates of frequency and the indemnity and medical severities. Frequency is defined as the ratio of the lost-time claim count (developed to ultimate) to on-leveled and wage-adjusted premium. Severity is defined as the ratio of (on-leveled, developed-to-ultimate, and wage-adjusted) losses to the number of lost-time claims (developed to ultimate). In a sensitivity analysis, ridge regression is applied to control for possible multicollinearity.
Results. The industries whose changes in the rates of employment growth are most pertinent to variations in the rate of frequency growth are health care and construction (but not manufacturing). The industrial structure is of little import to the growth rate of indemnity severity, but of consequence for the growth rate of medical severity. Further, the evidence regarding the effect on the growth rate of frequency of changes in the rate of employment growth agrees with the findings on the impact of job flows previously documented in Schmid.