COVID-19 to have lasting impact on workers’ comp premiums
Absent a miraculous economic recovery, workers' comp premiums written may not return to pre-pandemic levels until 2023.
When we’re asked how the COVID-19 outbreak may affect insurers, our answer is the classic consulting response — “It depends” — since the impact could differ widely depending on the line of business. Homeowners insurance, for example, may see premium growth flatten but could escape the pandemic relatively unscathed, given its solid base of insurable exposures.
Workers’ compensation, on the other hand, is likely to take a pounding on the back of historic unemployment.
Indeed, our analysis indicates that net written premiums for workers’ comp could fall by as much as 20% for 2020′s second quarter, followed by much smaller but not insignificant declines in the second half of the year — a trend that may extend into early 2021 and beyond. Absent a miraculous economic recovery, premiums written may not return to pre-pandemic levels until 2023.
A steep decline is perhaps inevitable given the fact that workers’ comp premiums are largely driven by how many people are employed. In the first month after the COVID-19 outbreak, the U.S. unemployment rate more than tripled, from 4.4% in March to 14.7% in April, which is the highest level since the Great Depression. And while that figure fell a bit in May and again in June, there are still tens of millions fewer workers for insurers to cover. Meanwhile, it is unclear how quickly employment will pick back up, especially given the recent surge of COVID-19 in several states, which could spur more layoffs and slow down recovery efforts.
Deloitte’s actuarial team (led by Matt Carrier, a principal at Deloitte Consulting LLP, and Jim Arns, a manager with Deloitte & Touche LLP) created a model to forecast net written premiums for 2020, 2021, and 2022 in a number of property-casualty lines, starting with workers’ comp. Their model projected three scenarios based on the potential speed of recovery from COVID-19, as established by Deloitte’s Global Economist Network: Baseline, No end in sight, and Fast bounce back.
The bottom line: Workers’ comp premiums may drop by 20% in Q2 2020
In our baseline scenario (which our economists say has a 70% probability of being realized), workers’ comp premium volume could drop by 19.5% quarter-on-quarter (QoQ) in Q2 2020 and by a further 4.1% cumulatively in Q3 and Q4 2020, before bottoming out in the first quarter of 2021. Our analysis suggests that premiums may not return to pre-COVID levels until after our extended forecast period of Q4 2022 (see figures 1 and 2). This is a significant decline compared to the 4.0% percent average annual growth rate of workers’ comp premiums over the past 10 years (2010 to 2019).
However, if recovery is slower than this baseline (our No end in sight scenario, with a 25% probability), premium volume could drop by 20.1% QoQ in Q2 2020, and by a further 5.5% cumulatively in Q3 and Q4 2020. On the other hand, even if the economy somehow stages a Fast bounce back (only a 5% probability), the drop in premium volume would still likely be 19% QoQ in Q2 2020, although just an additional 2.9% in Q3 and Q4 2020, cumulatively. (Keep in mind the current situation is fluid, and these projections are based on information known as of June 11, 2020. As the world continues to combat and adapt to the effects of COVID-19, the impact on workers’ comp will evolve.)
In all three scenarios, however, premium volume is not expected to return to pre-COVID levels before Q4 2022. This means that workers’ comp insurers may have to prepare themselves for an extended period of recovery.
There are additional mitigating circumstances to consider when analyzing the outlook for workers’ comp on a more granular level. For example, the impact of a smaller workforce on premium volume could be exaggerated by the fact that industries such as construction, contracting, and transportation, which generate relatively higher median workers’ comp premiums, saw significant job losses.
In addition, the National Council on Compensation Insurance has submitted an expedited rule change request to address the question of how to account for employees who are being paid but not working, to be classified under “idle time.” If approved, these payroll payments would not be used in the calculation of workers’ comp premium charges, which could further depress volume in the coming few quarters.
In the meantime, insurers should expect a mixed bag for workers’ comp claims, with varying impacts across industries. However, uncertainty around claims, in general, could linger as regulatory and legal frameworks evolve and potentially push losses higher. Insurers should also prepare for a decrease in claim file closure rates and higher operational costs because COVID-related claims will likely remain open longer than the average.
Calls to action for workers’ comp insurers
Here are some actions insurance carriers can take now to possibly help mitigate risk, protect their brands, and respond to market shifts:
- Practice prudence in underwriting. Carriers should look to shore up their risk selection standards and pricing models. Underwriting profitability could be paramount to remain viable, particularly in this low interest rate environment, when investment income is likely to be impacted as well.
- Align with the ‘new normal.’ Remote working will likely increase and remain in place for substantial numbers of covered employees. Insurers should be flexible and adapt their policies (and their own workforce and operations) quickly to changing work environments.
- Accelerate claims efficiency. With expense control becoming even more important, insurers should accelerate efforts to arm their claims departments with state-of-the-art technology tools. Artificial intelligence and advanced analytics, for example, can help insurers improve the speed, efficiency, and accuracy of underwriting as well as claims management decisions.
- Manage reputational risk. Carriers should also focus on managing potential reputational risks in the midst of the pandemic by continuing to demonstrate social responsibility and empathy for clients, claimants, and society at large. This may include using analytics to better anticipate client needs, providing positive experiences in managing claims, and remaining flexible with coverages and payment plans.
For more information about Deloitte’s forecast methodology, as well as our forecast for other lines of business, starting with homeowners’ insurance, to be followed next month by commercial and personal auto insurance, go to the Deloitte Insights COVID-19 impact forecasting site.
Former NU Property & Casualty Editor-in-Chief Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader at Deloitte’s Center for Financial Services. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
Nikhil Gokhale (ngokhale@deloitte.com) is an insurance research specialist at the Deloitte Center for Financial Services and project leader for the insurance premium forecasting series.
This piece is published with permission from Deloitte. See www.deloitte.com/about to learn more about Deloitte’s network of member firms.
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