Potential fuel hikes temper optimism over latest indicators, NCCI reports
The cautionary optimism is evident throughout the rate-making organization's latest quarterly update of economic changes that affect the workers' comp insurance line -- Gauging Current Conditions: The Economic Outlook and Its Impact on Workers' Compensation.
Recent improvements in the labor and housing markets -- key indicators for workers' comp -- appear to be on somewhat shaky ground, the report says. Despite recent positive economic news, stakeholders may want to look at the influencing factors.
For example, stronger corporate profits typically lead to increased hiring and an increased demand for workers' comp coverage.
"However, this has not happened during the current recovery," the report explains. Due to cost-cutting measures taken during the recession, "it appears that companies, having learned to do more with less, were able to bring production back up to prerecession levels without hiring significantly more workers."
The consensus forecast for double-digit growth in housing starts for the next two years is tempered by the prediction that it will be years before the sector returns to a more normal level. "Depressed home prices, a glut of home inventory on the market and a backlog of mortgages yet to enter the foreclosure process will continue to weigh on the housing recovery," the report says.
Rising fuel prices could negatively impact some otherwise positive signs such as the prediction for moderate growth in real disposable personal income and real personal consumption expenditures, both crucial for increased demand for workers' comp insurance. "If gasoline prices continue to rise, they will filter through to broader inflation and affect every other sector of the economy."
Pressure from rising gasoline prices could also offset the current utilization rate that suggests inflationary pressures are well-contained.
The report also outlines the potential effects of these economic indicators:
- Interest rates. The current low interest rate environment will keep downward pressure on investment income for the entire property/casualty industry.
- Medical inflation. Medical price inflation is a major driver of changes in medical severity. Accelerating medical care inflation suggests increased pressure on medical cost per claim. At the same time, increased use of costly medical treatment options will add further upward pressure to severity.
- Exports. "A healthy export sector is considered important for the recovery in workers' compensation business because of its favorable impact on the labor market and, particularly the manufacturing sector," the report says. "The export sector has been one of the few bright spots over the last few years."
Read more at the WorkersComp Forum homepage.
May 3, 2012
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