Rising inflation. How workers’ compensation premiums will fare: risk and insurance
The recent rise in inflation could be a boon for the workers’ compensation industry, although caution is warranted.
Soaring inflation has become the ever-escalating economic drumbeat ahead of the midterm elections in November, but in the workers’ compensation sector, executives see an improved image on the horizon for medical and wage inflation – despite the multi-decade high consumer price index is straining families’ wallets and patience.
As employers raise wages and benefits to meet employee salary expectations in a tight labor market, premiums are naturally rising, which is good news for workers’ compensation as a whole.
“The payroll is our base of exposure, so seeing increases in the payroll, whether it’s more jobs or more wages, has the same net effect. But how it spreads through a carrier’s book can vary. If in one bucket you have a million dollars in payroll with a hundred employees, then in another bucket you have a million dollars in payroll and that was just extra salaries paid to people, the second bucket would generally affect a worker’s compensation book more favorably,” said Matthew Zender, senior vice president of labor compensation strategy at AmTrust.
Employers and employees find a balance in a strong market
The latest figures from NCCI confirm this, with premiums rising by around 1% on average across all sectors, but the severity of medical and compensation claims is expected to remain virtually flat. Noting that the market is “strong and healthy” in its May 2022 State of the Line report, the official pricing body also recorded a combined ratio of 87 – the eighth consecutive year of underwriting profitability.
Barry Lipton, practice leader and principal actuary at NCCI, said employers shouldn’t worry too much about premium increases linked to inflationary pressure on wages.
“If there was an affordability issue in workers’ compensation, the increased premium could present a concern for the employer,” Lipton said. “However, due to several years of favorable experience, claims costs reported by NCCI have generally declined in recent years, minimizing upward pressure on premiums.”
An October 2021 report from the National Association of Social Insurance (NASI) supports Lipton’s view, noting that the cost to employers in terms of premiums per $100 of covered payroll is at its lowest level in 20 year. “So while wage inflation has a very large impact on workers’ benefits and bonuses, the impact is benign because benefits follow inflation and bonuses automatically stay in balance with benefits,” he said. explained Lipton.
In addition to insurers’ relatively optimistic outlook for sustainably higher premiums, there is an anecdotal benefit to workplace safety.
“A hundred more employees circling on average leads to more claims,” Zender said. “Additional wages for people who are already with you lead to increased benefits for those workers when they get injured, so their weekly rates could go up, but it also leads to increased satisfaction.
“Since satisfied employees are more likely to work safely, [that] tends to have a positive effect. So we tend to view wage growth with a bit of favor as an industry. We follow this very closely, but on average it’s not a bad thing.
The warnings from economic forecasters are not as dire given improving consumer expectations. According to a recent survey by the Federal Reserve Bank of New York, median inflation expectations for next year and three years ahead fell in July.
The closely watched central bank said consumer inflation expectations were 6.8% for next year and 3.6% three years from now in June, and in July had declined to 6, 2% and 3.2%, respectively. The bank noted that these were general findings across all income groups, but were more strongly correlated in lower income groups.
Harder-to-predict medical inflation could present challenges
While the consumer price index (CPI) and wage inflation are valid markers, workers’ compensation officials are also keeping a close eye on medical inflation, which is the most likely cause. the increase in overall costs.
“On the medical payments side, to the extent that medical salaries are growing faster than salaries in other industries, this may cause medical payments to increase at a faster rate than premiums increase,” Jeff said. Cole, AVP of National Accounts and FEMP for Sentinel Insurance. However, as Cole noted, the current situation does not appear to follow this trend.
According to the Bureau of Labor Statistics’ Employment Cost Index for July 2022 based on June figures, medical wage inflation at 5.9% is about the same as for the whole of the labor at 5.3%. Additionally, the past three months have only seen a 1.1% increase, with health care actually lagging slightly behind the overall labor wage increase of 1.4%.
“Overall, I expect the industry to see more [premiums] and more losses, but probably similar loss ratios,” Cole said.
However, this dynamic could change.
“Medical inflation generally exceeds the consumer price index. This has been an issue for as long as I have been involved in worker compensation and group health,” said Joseph Berardo Jr., CEO of Carisk.
“When you look at wage inflation on top of the drying up of COVID money, there are now hospital systems – which are already absorbing 60-70% of dollars spent on an episode of care – that are big and for-profit. , and these guys are aggressively tackling the health side of the band with double-digit increases on contract renewals.
“What the industry knows but doesn’t talk about on the competition side is that competition and automotive tends to be an afterthought, so if they’re going to put a big raise on a big health plan, the competition side is probably going to see something that’s going to be mid-teens.
Berardo said worker health care spending boils down to frequency times unit cost.
“This is especially true in states where there is no statutory fee schedule,” he said. “Regulators haven’t caught up, so we’re protected at this point, but I think in the next two to three years we’ll see that increase tremendously.”
Unlike the CPI, the Producer Price Index (PPI), as a measure of the cost of production, complicates the picture of medical inflation, to Berardo’s point. July 2022 figures from the Bureau of Labor Statistics analyzed by the Federal Reserve Bank of St. Louis show a selected PPI of 136.785% in the health care sector.
Recent interest rate hikes by the Fed have stoked fears of a recession among labor opinion leaders.
“When it comes to a recession, in the financial services sector or more broadly, it’s hard to create a soft landing from such a high level of inflation,” Cole explained.
This could prove problematic in the future, eroding compensation gains going forward, although payroll remains a virtuous exposure base for the workers compensation business line in the broader market. the transfer of risk of damage to property. &