Claiming behavior blamed for frequency uptick

"Frequency is up, there's no doubt about it," said National Council on Compensation Insurance's chief actuary. "The good news for the last 20 years may have come to a halt."

With that, Dennis Mealy announced what is at the very least a blip in one of the few positive influences on the workers' comp system: a year-to-year declining or stabilized rate of injuries. Whether it is the start of a new trend remains to be seen.

While the increase in frequency is not all that surprising given similar responses to recoveries from previous economic recessions, the underlying reasons seem to be a whole new ballgame this time around.

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Historically, recoveries bring new hires to the workforce and with them, an increased susceptibility to workplace injuries. "What we think is going on is claiming behavior has changed," Mealy said.

As Mealy explained, it appears there has been an influx of small lost time claims that previously would have been medical-only claims. As evidence is the fact that severity in 2010 was relatively flat.

Medical severity grew by just 2 percent -- the smallest increase since 1993. Indemnity claim costs declined by 3 percentage points -- the first drop since 1993.

"This doesn't mean cost drivers of workers' comp have miraculously gone away," Mealy said. "What's happening is smaller claims are entering the system."

The amount of the increase is another indicator of an atypical recovery from a recession. NCCI first put the increase at 9 percent before making corrections for what Mealy said were the following distorted statistics used to measure frequency because of the depth of the recession:

Premium audits shifted from positive to negative.
Average hours worked per week shifted from historical average.
A rapid decline in manufacturing and contracting employment.

The estimated 3 percent increase in frequency is one of the "negatives" contributing to what NCCI called the deteriorating state of the current workers' comp market. On the positive side, the industry's capital position is "very strong overall," Mealy said.

Other factors included in Mealy's report were:

The combined ratio increased five points to 115. "The pattern in increasing combined ratios is close to what it was in the last cycle," Mealy said.
Net written premium -- down 1.3 percent, a much smaller decline than in the previous two years.
Workers' comp prices continued to be reduced in many jurisdictions, although NCCI filed 14 increases in loss costs/rates for the 2010/2011 filing cycle.
The reserve position of private carriers went up $1 billion in 2010 to $10 billion. "The trend is disturbing," Mealy said. "If it continues, we'll have a reserving problem."
Investment gains rebounded, although yields remain at historically low levels. At the same time, private carriers posted a pretax operating loss of 1 percent -- the first since 2002 and the worst result since 2001.
Depopulation of the residual market continues but at a slower pace than in recent years. Premiums dropped 20 percent and are now approximately $400 million.

Read more at the WorkersComp Forum homepage.

May 19, 2011

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