Workers compensation is performing as a profitable outlier but worker shortages and inflation may put an end to the line’s growth.
In May 2022, the profitability of the workers compensation market over the past decade was described as “unprecedented" and “quite remarkable" by Donna Glenn, chief actuary, National Council on Compensation Insurance (NCCI), at NCCI's annual Insights Symposium in Florida.
Six months earlier, AM Best revised its outlook for the market from negative to stable for 2022, noting the unexpected “muting" effect the COVID-19 pandemic had on workers comp balance sheets. So, is the workers comp market the darling of the property-casualty insurance industry right now?
The answer: Yes. Workers comp is performing as an outlier for profitable underwriting results charting a combined ratio of 87% for 2021 and a continued profitability trend since 2014 across most states and industries, according to NCCI.
Nevertheless, the impact of the coronavirus pandemic is leaving many insurers watchful. “Although there are still questions about the long-term health implications of contracting SARS-CoV-2, the direct impacts of COVID-19 on the workers comp system are much better understood today compared to early in the pandemic," says Andrew Dalton, workers compensation practice lead, The Hartford. “Overall, the system has handled it well and likely will continue to do so."
Further, salary increases for many employees, albeit in some part due to rising inflation, are adding to the line's profitability. “We're certainly seeing rapidly rising wages, which is causing premium volume to rise," says Reagan Pufall, president & CEO, Omaha National. “Of course, it will also result in higher disability rates, but for the insurers that are good at managing claims to early resolution—and for the brokers who work with them—the rising premium volume will have an overall net positive impact."
Yet, while insurers continue to target the workers comp segment as an area for growth, challenges may impact this market moving forward. Profitability and reserve strength is expected to weaken if the current inflationary economy persists. Other factors, such as worker shortages, regulatory and legislative actions, and the impact of marijuana legislation, could also potentially put an end to profitability.
“A notable trend in workers comp over the past two years has been volatility of policyholder payroll levels and therefore audited premiums," Dalton says. “This started when businesses needed to reduce their staff in the early phase of the pandemic and subsequently has been driven by those businesses gradually restaffing their workforce as they find their new normal."
“This issue has been brewing for many years where you've got the baby boomers getting ready to retire leading to a mass exodus of institutional knowledge," says Meredith Messenger, founder & CEO of InsureGood in Hartford, Connecticut. “It's not a new issue, but I think it was extremely exacerbated by the onset of COVID-19. The whole idea of the Great Resignation, people changing careers and changing jobs—it's a complex issue that is really becoming something that could have an impact in a variety of ways."
The U.S. Bureau of Labor Statistics confirmed there were more job openings available in 2021 than there have been in the last two decades. The impact of such shortages has been that many employers were forced to hire inexperienced workers. Last year saw more temporary, short-term workers who may have been less familiar with their workplace and best practices, according to Leonard Herk, executive director and senior economist, NCCI.
Unfortunately, hiring new or inexperienced workers comes with multiple workers comp risks. In an analysis carried out by Travelers, 35% of workplace injuries occurred during an employee's first year on the job, according to 2015-2019 data. In 2020, these assumptions about the labor market and workers comp rang true as claims frequency decreased 7.6% but increased by approximately the same amount in 2021, according to data from NCCI.
The inflationary climate, coupled with the Great Resignation and a high number of available jobs, place continued strain on the market and provide opportunities for agents to be trusted advisers. “Rising wages and a very tough recruiting environment are putting pressure on employers in all industries, making it more important than ever for them to partner with agencies and insurers who can help them manage their workers comp costs," Pufall says.
Marijuana legalization is another challenge facing the market, particularly as there is no consensus on whether employees should be reimbursed for workers comp programs that prescribe medical marijuana for the treatment of an occupational injury. “It's a complicated issue, because it's still illegal at a federal level and state-specific legislation is all over the place," Messenger says. “That's challenging for small businesses or businesses in general to manage. I think the legalization of marijuana could be impactful in the workers comp marketplace and certainly for agents and clients who will need assistance and advice on how to navigate these issues."
Further evolving state regulatory changes will challenge the workers comp market in 2022 and beyond. “On a state level, because workers comp is so state-specific, there are a variety of bills that are being presented around communicable diseases, presumed PTSD, the idea of expanding psychological- or mental-only injury qualifications for workers comp to non-first responders," Messenger says. “Those are big changes that could be impactful depending on how states approach some of these new regulatory changes."
Olivia Overman is IA content editor.