In the first month after the COVID-19 outbreak, the US unemployment rate more than tripled, from 4.4% in March to 14.7% in April, which is the highest level since the Great Depression. And while that figure fell a bit in May, to 13.3%, this may have been due to data collection and reporting issues, which means May’s unemployment figure was likely to have actually risen to around 16%. In any case, there are tens of millions fewer workers for insurers to cover.
In addition, even if the virus recedes sooner rather than later, it is unclear how quickly employment will pick back up to pre-pandemic levels. The US and global economies are beginning a slow recovery while businesses continue to adapt to the outbreak’s long-term impact. Meanwhile, workers’ comp pricing is expected to remain competitive.
Working with our actuarial team, we created a model to forecast workers’ comp net written premiums for 2020, 2021, and 2022. Our model projected three scenarios based on the potential speed of recovery from COVID-19: baseline, no end in sight, and fast bounce back (see sidebar, “Forecast methodology”).
The bottom line: Forecast findings
In the baseline scenario, workers’ comp premium volume could drop by 19.5% quarter on quarter (QoQ) in Q2 2020 and by a further 4.1% cumulatively in Q3 and Q4 2020, before bottoming out in the first quarter of 2021. Our analysis suggests that premiums may not return to pre-COVID levels until after our extended forecast period of Q4 2022 (figures 1 and 2). This is a significant fall compared to the 4% average annual growth rate of workers’ comp premiums over the past 10 years (2010 to 2019).
If recovery is slower than this baseline (our no end in sight scenario), premium volume could drop by 20.1% QoQ in Q2 2020, and by a further 5.5% cumulatively in Q3 and Q4 2020. On the other hand, if the economy stages a fast bounce back, then the drop in premium volume may be 19% QoQ in Q2 2020 and a further 2.9% in Q3 and Q4 2020, cumulatively.
In all three scenarios, however, premium volume is not expected to return to pre-COVID levels before Q4 2022. This means that workers’ comp insurers may have to prepare themselves for an extended period of recovery.
There are additional mitigating circumstances to consider when analyzing the outlook for workers’ comp on a more granular level. For example, the impact of a smaller workforce on premium volume could be exaggerated by the fact that industries such as construction, contracting, and transportation, which generate relatively higher median workers’ comp premiums, saw significant job losses.
In addition, the National Council on Compensation Insurance has submitted an expedited rule change request to address the question of how to account for employees who are being paid but not working, to be classified under “idle time.” If approved, these payroll payments would not be used in the calculation of workers’ comp premium charges, which could further depress volume in the coming few quarters.
In the meantime, insurers should expect a mixed bag for workers’ comp claims, with varying impacts across industries. However, uncertainty around claims in general could linger as regulatory and legal frameworks evolve and potentially push losses higher. Insurers should also prepare for a decrease in claim file closure rates and higher operational costs because COVID-related claims will likely remain open longer than the average.
Calls to action for workers’ comp insurers
Here are some actions insurance carriers can take now to help mitigate risk, protect their brands, and respond to market shifts:
Practice prudence in underwriting. Carriers should look to shore up their risk-selection standards and pricing models. Underwriting profitability could be paramount to remain viable, particularly in this low interest rate environment, when investment income is likely to be impacted as well.
Align to the “new normal.” Remote working will likely increase and remain in place for substantial numbers of covered employees. Insurers should be flexible and adapt their policies (and their own workforce and operations) quickly to changing work environments.
Accelerate claims efficiency. With expense control becoming even more important, insurers should accelerate efforts to arm their claims departments with state-of-the-art technology tools. Artificial intelligence and advanced analytics, for example, can help insurers improve the speed, efficiency, and accuracy of underwriting as well as claims management decisions.
Manage reputational risk. Carriers should also focus on managing potential reputational risks in the midst of the pandemic by continuing to demonstrate social responsibility and empathy for clients, claimants, and society at large. This may include using analytics to better anticipate client needs, providing positive experiences in managing claims, and remaining flexible with coverages and payment plans.