Boca Raton, FL – NCCI recently released the latest edition of its Gauging the Economy newsletter, which examines the outlook for the economy and the workers’ compensation industry.
Some of the key findings include:
- Premium
The projected moderate pace in employment and wage growth as labor market conditions improve should result in increases in workers’ comp exposure and upward pressure on written premium. Changes in premium rate departures and the underwriting cycle are the big unknowns. Industry observers are reporting that the pace of tightening appears to be easing; however, low interest rates for newly invested funds suggest that the industry soon may need to look to improved underwriting results to maintain an acceptable return on surplus. One likely scenario is that the industry is offsetting underwriting losses by harvesting unrealized capital gains on its bond portfolio and reinvesting temporarily in short-term securities while waiting for the long-term end of the yield curve to rise as the economy comes out of recession. If so, the hope must be that interest rates will return to higher levels soon to take the pressure off of underwriting. - Frequency
Preliminary results presented at NCCI’s 2014 Annual Issues Symposium, which used NCCI’s measure of frequency change (the frequency of lost-time claims per $1 million of premium), showed that frequency decreased 2% in 2013, comparatively milder than the 6.1% decrease in 2012. Based on these numbers, it appears frequency will continue to follow its long-term downward trend. Although new job creation puts upward pressure on frequency, the modest pace suggests this impact may not be significant. - Indemnity Severity
Two key factors in determining indemnity severity are changes in average weekly wages (AWW) and changes in duration. There is some evidence that duration is countercyclical—it tends to fall during periods of economic growth, likely due to the increased availability of return-to-work opportunities.If the current recovery is not seriously derailed, the anticipated improvement in the labor market should result in unchanged or falling duration. The projected increase in the AWW should cause benefit levels to increase; but the impact on financial performance will be muted by offsetting increases in premium.
- Medical Severity
The increase in medical severity in the past two years has been relatively modest. This appears to be the result of reduced pressure from both medical price inflation and medical utilization. Experts disagree over whether this is because of the recent recession (in which case medical severity will increase as the economy recovers) or is structural (continuing over at least the near future).As usual, medical severity is likely to be the major factor contributing to changes in loss costs over the next couple of years.
The free newsletter is available from NCCI here: NCCI Gauging the Economy, August 2014
Source: NCCI