The recession is wreaking havoc with workers' comp numbers. Just ask the National Council on Compensation Insurance. The Florida-based ratemaking entity recently released its much anticipated state-of-the-line breakdown of the workers' comp market, showing frequency increased in 2010 while severity remained relatively stable.
But the numbers don't tell the whole story and the tweaking required to develop the latest report reveals an economic recovery unparalleled in recent history and raises concerns for the immediate future of the workers' comp system.
Frequency. NCCI actuaries calculated the rate of injuries for 2010 using their traditional methods for determining frequency. It showed an increase of 9 percent, compared to a decrease of 5.5 percent in 2009.
"Our initial reaction was, 'that just can be real. That is just too different,'" said NCCI chief economist Harry Shuford. "So that suggested something was going on with the numbers."What was going on was a combination of skewed numbers related to the recession and recovery. The most significant was the measure of premium.
"When insurance policies are written the insurance companies base the premium on an estimate of payroll for the coming year," Shuford said. "They typically base that on what they observe for the payroll in the prior year. Then later, often at the policy expiration point a year later, they go back and adjust the payroll for what actually happened during the year -- called a premium audit."
Shuford said it appears that the estimates of payroll based on the time period before the recession were too high, so the premium had to be adjusted downward. New policies were being written at the lower premium. At the same time, insurance companies were returning premium for the prior year -- making the net effect a recorded premium that was even more negative.
The premium being recorded for 2010 was understated, since insurers were returning premium for the prior year plus it was being written at depressed payroll rates of the recession, Shuford explained. NCCI actuaries adjusted the reported premium to a more appropriate measure relative to the workforce that was being covered.
"While this phenomenon of the impact of premium audit is not anything new, because of the depth and the length of this most recent recession it's had a much more significant impact on our numbers than we've seen in prior recessions for which we have comparable numbers," Shuford said. "The point here is that the recession had this major impact on reported premium, which caused some real volatility in the way we traditionally have measured frequency."
Adding to the mix was the amount of time people have been working. "One of the things that happened over the recession that was much more dramatic -- it happens in other recessions but not to this extent -- was the drop in the number of hours worked per week per worker," Shuford said. "Even though the number of workers went down a bit, the amount of time they were actually on the job went down even more. The traditional measure of premium does not take into account the impact of hours worked."
Again, NCCI actuaries had to make an adjustment so the numbers would be more accurate.
Finally, there was what NCCI called claiming behavior. Injured workers who would otherwise return to work for light duty assignments had fewer opportunities, since employers were cutting the hours of their full-time workers.
"Instead of coming back to light duty after a couple of days they had to wait a week or week and a half," Shuford said." That pushes them beyond the state waiting period and pushes them from medical only to lost-time claims."
This shift of claims from medical-only to lost time skewed the numbers for severity. "When a claim moves to lost time, you'll probably see average severity of both fall," Shuford said. "It's taking expensive medical-only [claims] and moving them to lost time, where it will be less costly."
The future. NCCI describes the state of the workers' comp market as 'deteriorating,' and Shuford says he personally expects that to continue for some time. His reason: the continuing financial crisis.
"The workers' comp market is really linked directly and strongly to what's going on in the labor markets in the U.S.," Shuford says. "Over the first 18 months of the recovery we saw that while in general many sectors of the economy were improving, it was improving without the traditional strong increase in employment."
Shuford says the growth in the labor market is strongly associated with the housing sector, which he believes will take several years to stabilize. "It's a major factor in the continuing, though not fully recognized financial crisis."
With an estimated 10 to 15 percent of U.S. households under water in their mortgages, homeowners can't borrow or save, or they have to default. Tied into that is the commercial banking sector, which is holding mortgages on its portfolio.
With some experts projecting an additional 10 percent decline in housing prices, municipalities are concerned about their property tax bases. Finally, there is the impact of the federal debt.
"So basically, if you line up all those things, we've got a major challenge," he said. "I do think the U.S. economy will recover, but the recovery will be long and slow and it will be seen most in the slow recovery of the labor markets, which is not a positive for workers' comp."
Read more at the WorkersComp Forum homepage.
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