How the changing workforce & rising interest rates impact workers' comp
While workers’ comp isn’t immune to inflationary pressures, the system does have guardrails in place to protect it.
Inflation is impacting everyone. Every day, we feel the effects of inflation as we fill our gas tanks or shop at the local grocery store. It is not in the news, but inflation and other macroeconomic factors also impact the insurance industry, especially the workers’ compensation market.
The inflation rate started to grow in late 2021, continued in early 2022 and is projected to moderate by mid-2023. According to the U.S. Bureau of Labor Statistics, as of April 2022, the inflation number is 8.3%. Inflation is measured by the Consumer Price Index (CPI), which calculates the average change over time of prices for consumer goods and services. The high inflation numbers are due to many factors, but an overheated economy mostly drives it due to the trillions of dollars of COVID-19 stimulus money in the economy.
Additionally, post-COVID-19 recovery, supply chain issues and labor shortages all have an impact. Higher energy costs are the largest category impacting the CPI, affecting the costs of vehicles, food and shelter. However, some categories, such as medical inflation, typically exceed inflation in the overall economy. Today, the medical inflation number is 2.9%.
Components of Workers’ Compensation Trends
Social inflation isn’t prevalent in workers’ compensation. But, there are economic trends that could impact workers’ comp, including:
- Lost Time Claim Frequency
- Medical Severity
- Indemnity Severity
- Wage Inflation
Also, extended medical inflation will affect the yearly losses more than is reflected in the pricing and can affect the runoff of prior years.
There are guards against runaway inflation for the workers’ compensation market:
- Regulated fee schedules
- Carrier negotiated fee schedules
- Settling claims
- No-fault system, with most claims not going through the court system
- Labor Market
One notable trend in workers’ compensation is the changing workforce and population demographics contributing to the labor shortage companies began experiencing in 2021. Baby Boomers have started retiring, and a record number of Americans left their jobs beginning in November 2021, leading to a period known as “The Great Resignation.”
Labor shortages existed even before the pandemic, especially in blue-collar industries. Around 85% of businesses with blue-collar workers reported staffing shortages and recruitment issues as early as 2019. When companies began reopening, many of these workers had reevaluated their lifestyles and decided against returning to an office building or job site full-time, even if that meant leaving and finding employment elsewhere.
Before the COVID-19 pandemic, unemployment was at historically low levels of 3.5%. As the world shutdown in April 2020, the U.S. unemployment rate peaked at 14.7%. Today, unemployment levels have returned to pre-COVID-19 levels and lower. In fact, as of April 2022, 20.8 million of the 22 million (or 95%) jobs lost because of the pandemic have been recovered.
Wage growth acceleration obscured the considerable loss in payroll exposures in 2020 due to the pandemic. Currently, there is a very tight labor market driving wage gains. The National Council on Compensation Insurance (NCCI) has determined that while the “great reshuffle” can cause the short-term anomalies we are seeing in the market now, it is unlikely to affect long-term frequency trends.
Short tenure or new workers impact
In 2021, the leisure and hospitality sector had the most significant percentage of short tenure or new workers. However, interestingly, the industries with short tenure workers with the highest tendency for injury was wholesale trade, followed by manufacturing. Workers in the leisure and hospitality industry have the largest quit rates at 5.7% compared to the financial and insurance sector, with a 1.6% turnover rate.
Due to the pandemic shutdowns, most businesses quickly switched to remote work. Today, professional and business services have the highest number of remote workers by industry. According to NCCI, remote worker injury frequency is low (down 20%) relative to on-site workers.
Impact of interest rates
The 10-year U.S. Treasury Notes yields have been below 5% for 15 years. During the pandemic, the Federal Reserve made emergency rate cuts. These pushed interest rates in 2020 to levels below the financial crisis during the Great Recession. With today’s strong economic recovery, inflation and Fed rate hikes are pushing yields up sharply. They should provide a modest boost to property and casualty insurer portfolio yields and longer-tailed lines as workers’ compensation.
This article was originally published on the AmTrust Financial website. It is reprinted here with permission.
Opinions expressed here are the authors’ own.
Bryan Ware is a director at AmTrust Financial. He currently focuses on workers’ compensation pricing and predictive modeling. He has held the roles of chief actuary for a mid-sized workers’ compensation company, chief pricing actuary for a major reinsurer and chief underwriter for an offshore alternative risk transfer reinsurer, among other roles in his career. With over 37 years of industry experience, he is a Fellow of the Casualty Actuarial Society, a member of the American Academy of Actuaries and a Chartered Enterprise Risk Analyst.
Matt Zender is senior vice president and Workers’ Compensation Product Manager for AmTrust Financial Services, one of the top workers’ compensation carriers in the U.S. At AmTrust, he manages the workers’ comp product line and strategy. He has been in the industry for over 25 years and is active in a number of committee and board positions of thought leaders and bureaus throughout the country, including CWCI, NCCI and NYCIRB.
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