The workers’ compensation line is unlikely to generate a profit this year and may not recover in 2021, an insurance industry economist said during a recent webcast.
Steven N. Weisbart, senior vice president and chief economist for the Insurance Information Institute, said carriers did
not factor in the cost of COVID-19 claims when they filed this year’s rates because the disease did not exist. The National Council on Compensation Insurance said the first full quarter’s data on COVID
claims costs won’t be available until the end of September, and workers’ compensation rates in many states will be set before then.
“We are talking about a really difficult year,” Weisbart said. “We are working with rates that were essentially generated a year ago or the year before. The rates may not be sufficient.”
Weisbart gave his grim prognosis during a panel discussion on the impact of COVID-19 on workers’ compensation along with NCCI Senior Actuary Sean Cooper and Senior Division Executive Jeff Eddinger. Insurance Information Institute communications director Mark Friedlander moderated.
One Insurer’s Early COVID-19 Workers’ Comp Experience
In taking what it said is a cautious approach to recognizing the impact of COVID-19, The Travelers Cos. reported in July a manageable $114 million in overall coronavirus-related losses. The losses were primarily in workers’ compensation along with some management liability claims. There were offsetting factors, resulting in a net charge overall of $50 million due to COVID-19 related activity.
“Some industry observers have speculated about the aggregate level of insured and investment losses arising out of the pandemic,” CEO Alan Schnitzer told analysts. “We don’t doubt the losses will be significant, but they won’t be borne evenly across insurers.”
In workers’ compensation, Travelers said most of its COVID-related claims have been from healthcare workers and first responders, which are not a significant part of its book of business. Also, Travelers noted that the frequency of those claims stabilized during the quarter.
Beyond the healthcare sector, data from some state workers’ comp systems suggest that the COVID-related claim rate is low relative to the infection rate, which could reflect that many of the older workers most seriously affected by COVID-19 are not in the workforce.
As it is watching the COVID-19 claims stabilize, Travelers has seen a lower volume of non-COVID-19 claims as workers have stayed home. The insurer expects this trend could change as employees return to the workplace and it is taking into account that severity could be adversely affected by injured workers delaying treatment due to the stay-at-home work environment. Finally, the insurer noted a low level of workers’ comp claim activity tends to exist during economic recessions as workers can be more motivated to stay at their jobs and the workforce tends to be more seasoned.
As for workers’ compensation pricing going forward, Schnitzer said that while the line has been profitable for several years and prices have been going down, prices may be “at or near the bottom” now.
Cooper said at this point, NCCI has data on COVID-19 claim costs only for the month of March. That claims data is being excluded when employers’ experience modifications are calculated, so insurers won’t be able to recover any increased costs.
NCCI said it started in July filing next year’s loss cost rates and experience ratings. Those rates will take effect beginning late this year and into mid-2021.
NCCI said in a July 16 memorandum that next year’s rates will not be adjusted to include the impact of COVID-19 claims. What’s more, the organization said it has no plans to submit updated “law-only” rate filings if state legislatures change workers’ compensation laws to make more virus claims compensable.
“As the COVID-19 pandemic is still in its early stages, projections of key assumptions for current and future time periods (e.g., infection/report/fatal rates) are wide ranging or not available,” the memo says.
During the webinar, Eddinger noted that several states have issued executive orders or passed legislation that creates a presumption that COVID-19 claims are compensable for employees who worked away from home. California, Illinois and Michigan have expanded coverage for the disease. Vermont became the latest to create a COVID-19 presumption when Gov. Phil Scott signed a bill into law on July 13.
Weisbart said the rush by lawmakers to ensure benefits are paid for workers who contract COVID-19 reminds him of their approach to business interruption claims. Attorneys are pressuring policymakers to expand coverage for a risk that was not contemplated when the insurance contracts were signed.
On the other hand, there are offsetting factors. Telecommuting has become the “new normal,” Weisbart said. Eddinger said employees who telecommute are less injury prone than workers in offices. Weibart said the pandemic is also hastening automation, which will reduce worker injuries.
Still, Weisbart said uncertainty about claims costs combined with dismal investment returns because of the economic contraction caused by the pandemic will challenge workers’ compensation carriers for the time being.
“It looks like it will be challenging for this line to break even for this year or even in future years, especially in light of the fact that for the past six years this has been a profitable line of insurance,” he said.
Eddinger said until the novel coronavirus arrived, workers’ compensation insurers would never expect to suffer a catastrophic loss from a pandemic. But since 2003, the world has seen the emergence of the SARS, H1N1, Ebola, and Zika viruses.
Eddinger said the time may have come for NCCI to develop a pandemic catastrophe risk factor that can be added to rates, similar to how a terrorism risk factor was added after the Sept. 11, 2001 terrorist attacks. He said NCCI has hired a catastrophe risk modeling firm to develop the risk factor.
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