Carriers toughen up on workers’ comp as post-Covid inflation concerns mount

The soft market conditions that have prevailed in the workers’ compensation sector are beginning to moderate with excess carriers increasingly looking to push harder on reinsurance terms, partly in response to what RPS Signature Programs’ Joseph Clifford said is projected inflationary pressure in the long-tail line of coverage.

Talking to Program Manager, Michigan-based Clifford, who serves RPS as area president, explained that the significant price decreases seen in recent years have slowed.

“The workers’ comp market is still soft, but it’s not been dropping year over year by the same percentages that it has been,” Clifford said.

“That’s not to say it isn’t still an aggressive line of insurance – it is – and companies are still seeing profits on the underwriting side,” he added.

But despite carriers still making profits, excess carriers have been requesting premium increases from their clients as concerns mount over loss cost inflation.

Worries over the potential impact of pandemic-related claims, as well as wage and medical cost inflation, are pushing insurers to look for rate rises.

Various jurisdictions around the US introduced presumptive legislation for certain industries, including healthcare and other emergency services, whereby if an individual caught Covid-19, it was given they contracted the illness while at work.

Segments such as healthcare, where nurses and doctors were on the frontline combatting Covid-19 cases, were hit particularly hard.

However, data collected from 45 jurisdictions by the National Council on Compensation Insurance (NCCI) showed that $630mn in Covid-related losses from some 80,000 claims was paid out by carriers in 2020.

According to the NCCI’s figures, the average Covid-19 workers’ compensation claim cost was $7,800.

Covid-19 claims concern

Clifford said he was only aware of a small number of major workers’ comp claims to have emerged from the pandemic, but accepted it was too early to truly know what impact Covid-19 may have had on the market.

The impact of the pandemic on claims varied greatly by industry, with most of RPS Signature Programs’ operations being in lower-exposure sectors, Clifford noted.

“Workers’ comp is a long-tail line. These claims that have happened in 2020 and 2021, and are happening now, we won’t know their true costs [for some time still].

“A small handful of claims are going to drive our costs because they’re impacted by medical inflation. Prescription inflation is huge in this industry. They’ve become one of the leading drivers of medical costs in the workers’ comp arena.

“The key question is how many of those big claims do we have on the books? And we won’t know for several years yet because our claim counts look good, but they won’t tell us what the costs are going to be due to the long-tail nature of this coverage,” explained Clifford.

And that is one of the reasons why excess carriers are pushing for rate increases, even with workers’ comp carriers having largely performed well in recent years.

“We’ve got all these new factors like massive wage inflation and massive medical inflation. The problem is the extent of the medical inflation won’t be known clearly for maybe half a decade,” said Clifford.

“With the large claims, we don’t really know what the ultimate costs are until they settle. And that oftentimes takes years because they’re litigated. There’s a lot of guesswork going into that equation,” said Clifford.

He explained that most carriers are taking a conservative approach and presuming that costs will continue to go up.

“When we talk to our excess carriers and purchase insurance and they’re taking increases of at least 2 to 4 percent, that says to us that we need to be getting increases too,” Clifford stated.

Workers’ comp premiums are dictated by payroll, and as Clifford noted, in the post-Covid-19 environment “payrolls are now going up quite a bit in all industries”, largely due to inflation-related pay increases.

Pre-Covid, someone in a Michigan-based fast-food establishment may have earned $12 an hour, but that’s now closer to $16.

“That’s a 33 percent increase, as an example, of wage inflation, so we got premiums going up because of wage inflation,” said Clifford.

And while wage inflation is increasing workers’ comp carriers’ premium volume, that does not mean it will cover the increased costs from claims.

Reduced investment income supports rate drive

Given the long-tail nature of workers’ comp, Clifford said investment income plays an important role in managing carriers’ books. But with investment income currently taking a hit, there is further need to push for rate.

“Investment income is a major factor in the pricing of workers’ comp, more so than in other lines on average, because there’s such a long tail,” said Clifford.

“When you start getting a squeeze on your investment, and the returns are different to what was projected when rate setting three years ago, that has a major effect on underwriting. That will also have an impact on the market softening slowing because the market is getting squeezed [on investments].”

Market studies report mixed pricing

According to the latest data from the Council of Insurance Agents & Brokers, workers’ compensation pricing has been trending slightly above and below flat since the second quarter of 2021.

In Q2 2021, workers’ comp pricing increased by 0.3 percent on average, while in the third quarter of last year, it was down 0.3 percent.

For the fourth quarter of 2021, workers’ comp pricing went up 0.3 percent, but in the first three months of this year, it dropped down 0.5 percent. That was followed by workers’ comp pricing in Q2 2022 falling by 1.2 percent.

Figures from US-focused distribution and MGA platform MarketScout showed workers’ comp pricing increased 1 percent in 2022’s second quarter, repeating the trend seen during the first three months of this year.

Workers’ comp pricing in Q4 2021 was flat, according to MarketScout, the same as in the third quarter of last year. In the three months to 30 June 2021, workers’ comp pricing went up by 1 percent, the Dallas, Texas-based business reported.