The workers compensation system is healthy and strong. On behalf of the National Council on Compensation Insurance (NCCI), it feels great to be able to say that with confidence, especially as NCCI is celebrating its 100th Anniversary. A visionary group of insurance policymakers and leaders created NCCI in 1923, and from its inception, our role has remained the same: to foster a healthy workers compensation system.
During the past 100 years, workers compensation has made American workplaces safer and helped millions of people recover from workplace injuries. Employers, workers, legislators, regulators, carriers, and all system stakeholders can be justifiably proud of what we have accomplished together—through 17 recessions, one world war, a fourfold expansion of the workforce, and a global pandemic—since the early 1920s. The system has been tested, and there will always be challenges. It’s how we prepare and respond that makes the industry resilient.
While this is a moment worth celebrating, it’s also a time to reflect on where we are today and on the challenges we may face in the future.
Workers Compensation Performance
At our recent
Annual Insights Symposium (AIS), NCCI Chief Actuary Donna Glenn shared our comprehensive
State of the Line Report. She emphasized that there is no one number that sums up the story of workers compensation today. But in the aggregate, the numbers she shared tell a compelling story.
For example, total nationwide workers compensation net written premiums increased 11% during the past year, rising to $47.5 billion. That is slightly higher than the premium level in 2019, indicating workers compensation has essentially made up the ground that was lost during the pandemic.
The 2022 calendar year combined ratio stands at 84%, another year of sub-90 performance, a sign of strong financial performance. The accident year combined ratio is also below 100 at 97% with prior years continuing to experience downward reserve development. NCCI estimates that private carriers hold redundant reserves of $17 billion, an increase from 2021. After a spike in 2021 related to various factors from a shifting workforce due to the pandemic, claim frequency has returned to its 20-year trend trajectory, declining 4% in the past year.
However, we do see a notable rise in severity for 2022, with medical claim severity increasing at about 5% and indemnity claim severity rising at about 6% year over year.
Potential Risks to Workers Compensation
Severity increases create the potential for longer-term risks to the health of the system when considering inflation and a potential recession. NCCI experts dug more deeply into related cost drivers, looking at trends in medical service, inflation, and “large” claims, which are defined as claims greater than $1 million.
Medical inflation has been much more muted than general inflation. Paying specific attention to the components of medical services that most directly impact workers compensation claims, the change in price index was roughly 2.5% to 3.5% year over year. Some components of medical services have even greater price pressure than this, such as home health, medical supplies, and transportation. These components tend to have a more significant impact on large, catastrophic claims than smaller claims, which is one reason we completed an in-depth study on large losses.
Our
large claims research shows the frequency of large claims has decreased at an annual rate of 3% during the past 20 years. However, the relative frequency of large claims due to burns, spinal cord injuries, and traumatic brain injuries has grown by nearly 7% per year since 2012. By contrast, large claims for degenerative disc disorders and back pain have decreased by 11% per year over the same period. In the first year, hospital costs are the biggest driver of large claims. As the claim ages, home health care services and medical equipment become the largest factors driving medical expenditures for these claims. It’s important to note that large claims are less than 0.5% of lost-time claims but make up a significant portion of total losses in workers compensation, up to 15%.
These increases in medical inflation, and the potential for large claims to escalate, are issues we will monitor closely. Today, however, they do not create any cause for alarm in relation to the health of the workers compensation system.
Framing the Future
Like many things, workers compensation is more complex than it was in 1923. One hundred years from now, the system will look vastly different than today. The only certainty is that we must continue to evolve and be responsive to our stakeholders.
NCCI is paving the way for fresher data that supports critical industry analysis, revitalizing the class system to reflect the modern workforce and workplace, and transforming how you access NCCI data, solutions, and Thought Leadership to help you make informed decisions. Our stakeholders have asked for this, and we are responding.
This is an exciting time for our industry and NCCI as we prepare for the next 100 years. We serve the system: carriers, regulators, policymakers, and all those who support our most important system stakeholders—workers and their families. NCCI is committed to the workers compensation system—now and for our future.
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