The COVID-19 pandemic caused a major stir in the US labor market. Job losses hit low-wage workers the hardest, according to Labor Department employment data, which found that the lowest-paying industries accounted for 30% of all jobs, but 59% of the jobs lost, from February 2020 to October 2021.
When the economy recovered and pandemic restrictions were lifted, demand for workers increased significantly, but employers were up against a labor shortage. This was part of the phenomenon known as the Great Resignation, or the Great Reshuffling, where people quit their jobs in search of greener pastures elsewhere, with better pay, benefits, and flexible working arrangements.
Employers are increasing wages to attract and retain workers in today’s tight labor market – and, as their payrolls expand, their workers’ compensation premiums automatically rise along with their indemnity benefits.
“Payroll is a great exposure base because it is inflation sensitive,” said NCCI practice leader and senior actuary Barry Lipton. “When wages go up, payrolls go up, and workers’ compensation premiums go up – without the need for a rate increase.”
The three elements – wages, premiums, and benefits – typically stay in balance. However, the speed of the Great Reshuffle and the sheer number of people switching jobs, may create some short-term disconnects between wages, indemnity payments, and workers’ compensation premiums, according to the NCCI.
This potential imbalance could trigger a turnaround in the workers’ compensation insurance market, which has been soft and very competitive for quite some time. This is especially true if there’s an uptick in injuries due to employers having to bring on less experienced staff amid the current talent crunch.
“Workers’ compensation rates [recently] have been all-time competitive … while other lines of coverage are seeing very severe, significant rate increases,” said Jessica Cullen, managing director of the casualty practice at Gallagher. “I often say: ‘Workers’ comp is the oasis in the desert.’ It’s the one place where we can give good news to our insureds, and we can achieve rate reductions and secure really competitive programs.
“However, there are several factors that could impact the market. COVID cases are not impacting modification factors [so far], but what will that do to loss ratios [longer-term]? Are we going to see mental anguish or stress-related claims start building some momentum, which will also put pressure on the workers’ compensation system? As employees are shuffling around and starting new jobs with less experience, how will that impact workplace injury rates? We also have an ageing population in the workforce – how is that going to put a strain, long-term, on the workers’ compensation system?”
Workers’ compensation underwriters are starting to talk about inflation, but more in terms of their own inflationary costs, according to Cullen. Like the employers they’re providing comp for, insurers are also increasing their wages to attract and retain staff. They’re making changes to keep up with general economic inflation and the probability of tighter monetary policy.
“To prepare for [an inflationary period], we would encourage our clients to ensure their payroll projections are as accurate as possible,” Cullen emphasized. “Sometimes it’s challenging to project what costs will be this time next year, but we like to contemplate that ahead of time with our clients. If we know their payroll is going up, we might try to get a reduction in rate to help offset some of that wage inflation.
“If a client’s payroll increases by 50%, I’m going to ask for rate reductions because, in theory, the job hasn’t become any more dangerous just because employees are being paid more to do it. We try to look at that holistically and show underwriters that […] if an employee gets a big retention bonus, they’re not more likely to get hurt and have a claim than they were when they were earning less.”
The good news, according to Cullen, is that the workers’ compensation market remains competitive. She said: “If you can’t convince underwriters, based on the information you have, then we would recommend going to market. If the payrolls are going up, that means the premiums are going to go up regardless […] so that creates an environment where we can generate some competition in the market. When in doubt, put it to market.”