The focus of maintaining a healthy workers compensation system for injured workers and employers has been a theme in my professional life for more than three decades. Workers compensation is a critical economic engine with $42 billion in premium annually.
One important lesson I’ve learned during my years in this industry is that workers compensation stakeholders have an aversion to uncertainty. So these observations about the system in 2022 will likely be appreciated … for the most part.
The system is strong and financially stable. However, there are hints of uncertainty on several fronts. Let me explain how we are navigating these uncertainties.
The harsh reality is that the pain of the pandemic has not yet subsided. In particular, healthcare workers and our hospitals remain strained in extraordinary ways. First responders and caregivers have earned our respect and admiration for their sacrifices and ongoing commitment to treating people with COVID-19.
Early in the pandemic, many of us feared the workers compensation system might be stretched and strained in similar ways. But the system has been resilient with claims at levels far lower than initial projections. In fact, NCCI recently completed a joint research study of COVID 19 claims through 2020 with nine independent workers compensation bureaus and here’s what we found:
- There were approximately 80,000 COVID-19 claims in 45 states
- COVID-19 claims cost an average of $7,800
- We saw a total of $630 million in COVID-19 incurred losses
These are significant data points, but they do not alter the fundamental dynamics of the workers compensation system. We will know more as we analyze 2021 data, but we do not expect a radical shift.
The pandemic and the economic downturn reduced net written premium substantially in 2020, dropping 10%. Even so, the market posted a seventh straight year of underwriting profitability with an 87 combined ratio. The reserve redundancy grew to $14 billion. NCCI’s most recent Quarterly Economics Briefing details the underlying strength of the employment market and overall economy, despite lingering supply chain snags and concerns about inflation.
In addition, medical severity is muted and claims frequency continues its long-term decline as workers and workplaces continue to get safer. Key financial metrics currently reinforce the resilience and stability of the workers compensation system.
Hints of Uncertainty
But before I go further, I would like to address the cautionary notes raised in NCCI’s recent survey of more than 100 workers compensation insurance executives.
Genuine uncertainties abound, in particular about rate adequacy, changes in the workplace and workforce, and the potential for rising medical costs.
To be clear, rate adequacy is always a concern for many stakeholders. It’s the fundamental challenge underwriters face in long-tail lines of insurance such as workers compensation. They must set a price for their product when the ultimate cost may not be fully realized for decades. However, we have never had underwriting systems, analytics, and insights into worker injury patterns like we have today. Surprises happen of course, but NCCI does not see market-shifting events lurking on the short-term horizon.
The outlook for the workforce and workplace of tomorrow contains more unknowns than in any recent time. A valid question is how the dust will settle on the Great Reshuffle of workers coming into new jobs, new industries, and new working environments. We learned in the Great Recession that workers on the move can contribute to an influx of workers compensation claims. New workers in new jobs are less familiar with safety practices. Less experienced and less skilled workers also tend to have higher injury rates. However, at this moment, we do not yet see signals of concern.
The practice of medicine has never changed so rapidly. New efficiencies such as telemedicine have gained popularity. Promising innovations in treatment for a wide range of injuries are emerging, but they also come with significant costs. The business of medicine is also changing quickly with rapid consolidation of hospitals, clinics, and other providers, which can drive up prices.
During the early 2000s, medical costs were rising fast in workers compensation, impacted by greater price inflation and growing use of medical services. During the past decade, cost containment measures helped to constrain medical cost increases. These range from medical fee schedules to nurse case and prescription drug management to inpatient/outpatient hospital stay dynamics to ambulatory surgical center practices. In recent years, improved management and decreased use of prescription drugs in workers compensation, particularly opioids, has also been a key component of the slowdown in medical cost trends. Underlying medical inflation is currently 2% to 2.5%, which is modest compared to recent history. It’s something we’re watching, and we’ll continue to do more analysis.
The Path Ahead
At its best, workers compensation helps enable a thriving economy while helping injured workers and their families recover as they face personal hardship. The system is in a great position today to meet its commitments.
Uncertainties remain. NCCI plays a critical role in monitoring rate adequacy, claims trends, inflation risks, and changing workforce dynamics. Today our analysis shows those uncertainties do not represent immediate threats.
But as we have seen during the past two years, unexpected events have threatened, but did not undermine, the status quo. Our stakeholders have NCCI’s commitment that we will provide fresh insight and continued vigilance to help maintain a healthy workers compensation system.
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