Over the last several years, the workers compensation (WC) line of insurance has seen notable decreases in bureau level changes in states where NCCI provides ratemaking services. The main driver of these decreases stems from improved loss costs, which is defined as the portion of premium allocated to provide for indemnity and medical costs within the WC system. The article describes factors that impact loss cost changes and provides a deeper dive into the relatively larger decreases observed in recent years.
KEY INSIGHTS
- When costs outpace wage inflation, loss cost increases are generally warranted to keep premium and losses in balance.
- If costs are keeping up with wage inflation, premiums will be in balance and changes to overall loss costs may not be necessary.
- In recent history, costs have been increasing at a slower pace than wages, resulting in decreases in loss costs.
Factors contributing to the WC bureau loss costs decreases include increases to the inflationary exposure base (payroll) used to derive premium and declines in claim frequency. Additionally, changes in claim severity in recent years have been moderate when compared to wage growth, contributing to the more pronounced decreases.
The goal of the ratemaking process is to have sufficient premium to cover costs with one measure being to ensure the portion of premium allocated to covering losses equals the losses themselves (loss costs). Despite the loss cost decreases, because the WC premium calculation uses payroll as the exposure base, total premiums are likely to increase over time as average weekly wages grow.
Frequency continues to decline, partly due to the increased automation and improved safety technologies in the workplace. In recent years, claim severity has flattened, contributing to steeper decreases in loss cost levels. Medical severity changes have moderated, in part due to factors like medical fee schedules and decreased opioid utilization. Indemnity severity changes have aligned relatively closely with wage inflation.
The combined impact of frequency and severity produces medical and indemnity loss ratios, which are calculated by dividing losses by premium. We see consistent decreases in both medical and indemnity loss ratios, with steeper decreases after 2010—driving the observed decreases in bureau level changes over this period.
Although the COVID pandemic came with many uncertainties and challenges, in general, WC experience improved even more after the COVID pandemic. In most states, 2020 loss ratios continued the decreasing patterns observed in previous years. Furthermore, the more recent loss experience in 2021 and 2022 has demonstrated continued improvement. This is driven in part by the rebounding economy and the acceleration in wage growth.
NCCI is closely monitoring different components of loss costs and characteristics that are likely to influence changes in these factors. NCCI is committed to evaluating any early signs of shifts or changes to ensure they are accounted for in the ratemaking process.
Check out the
full report for even more insights on "Understanding Loss Cost Actions."
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