The current recession is the second longest in our country’s history. Per the National Bureau of Economic Research (NBER), the recession started in December 2007. In April 2010 the NBER let an internal split become public, some of the economists wanted to call the recession over but others did not, they wanted more data. For everyone related to the workers’ comp field, the recession is still here.
The Insurance Journal reports the combined loss ratio for workers’ compensation insurers for 2008 was 101. [That means for every $100 the insurance companies took in, they paid out $101]. In 2009 the combined loss ratio for workers’ comp insurers jumped nine points to 110. It is hard to stay in business when you spend $110 for every $100 you earn.
According to the National Council on Compensation Insurance (NCCI), 2009 was really not that bad. The combined loss ratio would have been 107 except for one large carrier adding $1 billion to its excess workers’ comp reserves. Still, for all the other workers’ comp carriers, spending on average $107 for every $100 taken in is not a good thing.
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The NCCI also reported net written workers’ comp insurance premiums dropped by 23% from 2007 to 2009. The primary cause of the downturn in premiums was the downturn in the economy. Among the companies hit the hardest by the recession were the employers in the construction and manufacturing fields. Both of these fields have higher than average workers’ comp premiums.
As the workers’ comp premium calculation is based on payroll, a great way to reduce premiums is to lay off workers. [Of course if you take that approach too far, you go out of business!]. The impact of employers laying off workers was less premiums being paid to the workers’ comp insurers, At the same time the premium collection was being reduced, the existing workers’ comp claims being paid. Hopefully, the workers’ comp insurers have adequate reserves set up on each claim, but if one company is adding $1 billion to reserves…it makes you wonder.
Workers’ comp insurers with loss ratios in excess of 100 know how to correct the loss ratio — they raise the workers’ comp premiums they charge to employers. However, they have to remain competitive in order to keep existing business and hopefully obtain new business.
The employers on the other hand should see some positive impacts on workers’ comp besides lower premiums due to fewer employees. The employees who are still employed tend to be the more experienced employees who have fewer accidents and injuries then less experienced employees. This results in the experience modification factor improving over time, resulting in a lower workers’ comp premium in the future.
The biggest impact of the recession on workers’ comp may be the psychological impact it has on employees. There are well-documented spikes in the number of workers’ comp claims for employers who close a factory or make other wholesale personnel reductions. Unscrupulous employees, believing they are about to be terminated, prefer the two-thirds of their average weekly wage from workers’ comp over the one-third of their average weekly wage from unemployment insurance (both workers’ comp indemnity benefits and unemployment insurance benefits vary by state).
Old injuries not a bother to the employee for years suddenly take a severe turn for the worse the week before the lay-off. Or, the employee who rarely works alone was working alone and strained his back the day before the lay-off. Or, the employee reports she was hurt months ago, and tried to tough it out, but can no longer stand the pain, and needs to go to the doctor now. Lay-offs are a challenge for the workers’ comp claims office as the claims come in a bunch and all the claims need to be investigated at the same time.
The flip side to workers’ comp fraud is the recession also spawns a drop in workers’ comp claims. There are the employees who have a legitimate workers’ comp injury, but in their effort to ‘stay in good with the boss,’ don’t report their claim for fear it will move them closer to the top of the layoff list.
Another psychological impact is on the employees with an obvious injury and must report their claims. They do so reluctantly. These employees, who might have taken a few days off when they got hurt, decide they do not want to do anything to jeopardize their job. They chose to be at work when they could legitimately stay home. What would have been a workers’ comp indemnity claim becomes a workers’ comp medical only claim.
Of course there are also the employees who were truly injured and were out on disability benefits before a factory closing or layoff was announced. The psychological impact on them is a reluctancy to recover from their injury, as they know once they return to work, they will be terminated for lack of work. They are aware of the recession and are very concerned they will not be able to find another job.
The psychological impact also works the opposite way for the employee out on disability benefits. If they are not concerned about being terminated as soon as they return to work, they may try to convince their doctor they are ready and able to return to work. They fear if they stay out of work too long, it could cost them their job.
Hopefully when the National Bureau of Economic Research gives their next assessment all the economists will be in agreement that the recession is over. Even if the recession is over, it will take a while for the impact of the recession on workers’ comp to dissipate.
Author Robert Elliott, J.D., Consultant/President, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, healthcare, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. Contact her: [email protected] or 860-553-6604.
WC Books: http://www.reduceyourworkerscomp.com/workers-comp-books-manuals.php
WC Calculator: http://www.reduceyourworkerscomp.com/calculator.php
Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers’ comp issues.
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