WC Claims Frequency Continued to Drop in '08, NCCI Says

A key issue facing employers and workers' compensation insurers is whether the large declines in claims frequency that began in the 1990s will continue.

However, a new study by the National Council on Compensation Insurance has brought a welcomed dose of good news to businesses and insurance leaders.

Researchers from the organization, which analyzes trends in the workers' compensation industry and prepares rate recommendations for several states, found that claims frequency continued to fall in 2008. The study concluded that the current economic conditions suggest further reductions are in store in the coming year.

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Indemnity, medical severities increase. The NCCI report, An Analysis of Factors Affecting Changes in Manufacturing Incidence Rates, examined factors underlying the long-term decline in frequency since the early 1990s. Researchers said preliminary data for accident year 2008 revealed a decline of 4 percent in claims frequency for 2008. This comes on the heels of a 2.6 percent drop in 2007.

However, it wasn't all positive news. Despite the fact that injury rates have dropped by approximately 55 percent since 1991, indemnity and medical severities have steadily increased. In order to examine the trends more closely, NCCI compared the latest available statistical plan data for states for which the organization provides ratemaking services to the same data from four years prior. Most analyses in the study compared policies that expired in 2007 to policies that expired in 2003. In addition, an analysis was added to this year's study to explore the recent increase in permanent total claims.

Key findings. Among the highlights of the study, NCCI researchers found that:

Virtually every major employment category experienced a marked decline. According to the study, over the last five years, there were significant declines in total lost time claims frequency for all industries, geographic regions and employer sizes.

Indemnity and medical severities offset frequency drop. According to the study, the increased cost of a claim offset the drop in claims frequency. However, researchers said that annual increases in average indemnity costs per claim have tapered off significantly in the past seven years.

"While indemnity severity rose by an average 8.7 percent between 1996 and 2001, the average annual increase since then has been 3.6 percent," the study noted. "This includes an NCCI-estimated increase of 5 percent for 2008. In part, this easing in the growth of indemnity severity reflects the limited growth in wages during and following the recession of 2001."

The study found an estimated 6 percent growth for 2008 in average medical costs per claim. While this was substantial, researchers said the 18.9 percent cumulative increase since 2006 was less than in any other three-year period.

"In addition to medical price inflation, increases in the utilization of medical services are a significant driver of this growth," researchers noted. "Nonuniform changes in claim frequency by size of claim, discussed in prior studies, have also contributed to the severity increases for both indemnity and medical in past years. To some degree, nonuniform changes in claim frequency by size of claim might also be related to changes in utilization patterns."

Permanent total claims have increased significantly. The number and frequency of permanent total claims have increased significantly over the last four years, with all major causes of injury contributing to the rise.

"While all injury types show a decline over the entire 10-year period, permanent total claims have experienced increased frequency over the past four years," researchers said. "Although permanent total claims generally make up less than 1 percent of lost time claims, they are the most costly claims, accounting for approximately 10 percent of lost time costs."

Aging workforce not driving permanent total claims. As a new feature to this year's study, NCCI researchers examined differences over time in permanent total claims by age of employees.

"One reason for this was that the average age of the workforce has been increasing, primarily due to aging baby boomers," the study noted. "Because older workers tend to have more permanent total claims, this was a potential explanation for the recent uptick in these types of claims."

However, researchers said, the data told a different story. The study found that the rise in permanent total claims appeared to be driven primarily by workers age 50 or younger. Based on a sample of data, that age group experienced a much larger increase in permanent total claims between 2003 and 2006 than did older workers. NCCI said it plans to continue its research into possible explanations for the rise in permanent total claim frequency.

Single-state risks in some classes had higher frequency at the higher payroll sizes. While claim frequency generally decreases as risk size increases, single-state risks in some classes have higher claim frequency at the higher payroll sizes than at lower payroll sizes. For example, the study revealed relatively high lost time and total claim frequencies on single-state policies with payroll exceeding $10 million in the office and clerical industry group.

Read more at the WORKERSCOMP Forum^TM homepage.

August 17, 2009

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