A recent study based on data collected through 2004 shows that workers’ compensation claims frequency is down — yet costs continue to rise. The lowered frequency of claims includes large claims and small claims alike.
Tony DiDonato, an actuary with the National Council on Compensation Insurance Inc., or NCCI Holdings Inc., authored the article. NCCI, based in Boca Raton, Fla., is an industry workers’ compensation statistical and rating organization.
“While the continued overall decline is certainly good news, it is probably not a surprise to most industry observers given claims experience over the past 15 years,” DiDonato said. “What may be surprising, though, is that the decline now seems to be just as prominent among the medium and large claims as it is for the small claims. This is somewhat unexpected since past studies have shown the frequency decline was much more pronounced for the smaller claims.”
DiDonato’s research did not yield a specific segment or category to which he attributed his findings.
“There is really no smoking gun here,” DiDonato said. “There are no regional or geographic variations noted, and there aren’t really any significant socio-economic variances that would swing the data one way or another.”
Older workers affect costs
The major factor driving down claims frequency, according to DiDonato, is the aging work force. As the population ages, older workers become a larger part of the labor force, and the law of averages parallels these trends.
As older workers drive the workers’ comp claims frequency trend downward on one hand, they drive up cost trends on the other. DiDonato said while older employees generally tend to have fewer claims, perhaps based on their level of experience on the job and a keener attention to safety precautions, the fact remains that it is costlier to repair and rehabilitate work-related injuries of older workers.
“Also, older workers tend to earn higher wages,” DiDonato said. “Indemnity is based on higher wages — that’s the main point.” He added that older workers can be out of work longer than their younger counterparts for the same injury.
The difference in frequency declines by size of claim appears to have leveled in the two most recent years studied. In 2003 and 2004, the claim frequency changes for small and large lost-time claims appear similar: “This is good news since it means the high-cost claims are now sharing equally in the claim frequency decline,” DiDonato said.
Indemnity up, but slowing
A key question facing employers and workers’ compensation insurers is whether the large declines in claim frequency that began in the 1990s are likely to continue. Virtually every major employment category examined has experienced marked declines, according to the NCCI study.
The good news is that while indemnity costs are increasing, they are slowing. “If there is any good news to be gleaned from the severity changes, it is that the annual increases in indemnity have tapered off significantly in the past four years. While indemnity severity rose by an average 9.3 percent between 1996 and 2001, the average annual increase since then has been 3.7 percent. This includes an NCCI-estimated increase of 2 percent for 2005. In part, this easing in the growth of indemnity severity reflects the limited growth in wage rates during the weak labor market during and following the recession of 2001,” the report indicated.
Understanding the impact that changes in claim frequency can have on claim severity can help predict future changes in both, DiDonato said. His research revealed significant increases in both indemnity and medical severities. Part of the increase is due to the greater percentage decline in small claims versus large claims over much of that time period, because the relatively larger claims remain in the system.
“In last year’s study, we estimated that the uneven changes in injury rates, by size of claim, contributed approximately 3 percent per year to the indemnity severity increase and approximately 2 percent per year to the medical severity increase from 1999 to 2003,” DiDonato said.
Industry affects claims
This year’s report included a review of claim frequency, as well as severity, by industry group. DiDonato reported that all major industry groups have the claim frequency decline in common over the time period studied. The decline ranges from 12 percent for office and clerical to 20 percent for contracting.
“It probably comes as no surprise that an office environment would generally experience fewer claims per payroll dollar, or per worker, than industries such as contracting or manufacturing,” DiDonato said.
NCCI’s research found that after accounting for both claim frequency and claim severity, premiums by industry group are equitable.
The study showed an across-the-board decline in claims frequency for 15 of the largest occupations. It noted that changes in occupational mix accounted for 5 percent of the 20 percent claim frequency decline between 2000 and 2004.
DiDonato believes several factors are driving the current claims frequency trend, including: a continued emphasis on workplace safety in all employment classes; increased use of robotics; advances in ergonomic design; increased use of modular design and construction techniques; increased and improved job training; proliferation of cordless tools; and increased use of power-assisted processes.