Experts say recession expected to have mixed impact on comp market

The economic and financial downturn will have a mixed impact on the workers' compensation market, insurance experts told attendees at the Casualty Actuarial Society's ratemaking and product management seminar.

A panel of insurance industry leaders, moderated by Harry Shuford, chief economist at the National Council on Compensation Insurance, concluded that recessions tend to place downward pressure on workers' comp exposure. This is due, the group said, to declines in employment and slower growth or declines in wage rates.

"During a recession head count is going down while the average weekly wage in all past recessions has continued to grow but at a much slower pace," Shuford told attendees.

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In addition, the panelists said recessions tend to place a downward pressure on workers' comp claim frequency by increasing the skill level of the workforce. Shuford noted that the frequency of claims has been falling steadily since the early 1990s and will likely continue to decline for the foreseeable future.

"In the first two of the three most recent recessions, claims frequency dipped dramatically," he said. "In the most recent recession of 2001, the downturn was already under way, and there was an increase in the rate of decline."

Shuford noted that the growth in indemnity severity eases during recessions, driven by the slowing of growth in wage rates.

"The big impact on indemnity severity comes the year after the recession as the average weekly wage levels during the recession appear in the benefits structure," he said.

Frank Schmid, director and senior economist at NCCI, said the growth rate of workplace injury and illness rates drops sharply during recessions and rises sharply during recoveries.

"Frequency growth bottoms out with economic activity before rising sharply during the ensuring recovery," he said. "Going into recession, frequency drops by 2.5 percentage points, going out it will increase by 5 percentage points before reverting to its pre-recession level."

Schmid explained that these two effects are driven by slowing job creation during recessions and accelerated job creation during recoveries.

"Faster job creation is associated with an increase in the growth rate of workplace injury and illness incidence rate," he said, adding that evidence provided by the U.S. Bureau of Labor Statistics relates the higher incidence rates to shorter job tenure.

Schmid said accelerated job destruction at the onset of a recession also increases the growth rate of the workplace injury and illness incidence rate. This finding, he said, is indicative of moral hazard or opportunistic behavior.

"It is a widely held belief and anecdotal evidence shows that layoffs give rise to workers' compensation claims that you would not see otherwise," Schmid said.

On net, Schmid said, recessions tend to cause a decline in the growth of workplace injury and illness rates.

"Similarly, on net, recoveries from recessions come with an increase in the growth of the workplace injury and illness incidence rate," he said.

June 8, 2009

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