Workers’ compensation rate decreases are encouraging, but may not translate into lower prices for employers right away.
Workersâ compensation rates are finally beginning to reverse an upwards trend. Fifteen out of 20 rate and advisory loss cost filings submitted by the National Council on Compensation Insurance (NCCI) so far this year have displayed decreases. Nine out of 10 filings submitted in the risk assigned market have also reflected decreasing rates.
âIt really is a fascinating dynamic,â said Eric Silverstein, risk management leader at Locktonâs Dallas office. âWeâre getting close to a tipping point where, if you look at the number of states that have passed through rate decreases, itâs getting close to a majority.â
Those decreases, however, may not translate into lower prices for employers right away.
âAt our annual conference, we use certain buzzwords. A couple years ago, we said the numbers were âconflicted.â Last year we called them âencouraging.â This year they are âbalanced,ââ said Peter Burton, senior executive for state relations at NCCI.
Rate changes in NCCI-rated states range from an increase of 6.8 percent in D.C. to a decrease of 10.4 percent in Kansas. While a handful have posted increases or no change at all, the majority will propose rate reductions going into 2015.
âFlorida just went down 2.4 percent. Oklahoma has significant reform and was down about 15 percent,â Silverstein said. âSo it will vary by state and by class code within each state as well.â
âHowever, that doesnât necessarily reflect into price decreases for all buyers,â he said. âInsurers have a certain amount of flexibility in their underwriting process, and they wonât necessarily use that filed rate, depending on what the particular state regulations are.â
The price that companies ultimately end up paying will be determined by their respective risk profiles. Those with positive profiles will reap the benefits of the decreased rates, while those with poor risk profiles could end up paying more.
Regulators, Silverstein said, file their rates based on results from preceding years, but insurers will ultimately price their products to anticipate future fluctuations as well.
Nonetheless, the rate decreases are encouraging signs of a softening and more competitive workersâ comp marketplace.
Economic and Market Forces
The improving economy is partly to thank. Rising employment means bigger payrolls and bigger premiums. $42 million in workersâ comp premiums have been written this cycle, which runs from July 1 to the end of next June, according to Burton.
âThis is the third year in a row itâs gone up,â he said.
Good underwriting results have also contributed, as well as a decline in injury rates. According to the Bureau of Labor Statistics, âNo private industry sector experienced an increase in the rate of injuries and illnesses in 2012.â The injury and illness incidence rate for 2012 was about 3.4 cases per 100 full-time workers, which âcontinues the pattern of statistically significant declines that, with the exception of 2011, occurred annually for the last decade.â According to Burton, some states have seen injury rates fall by as much as 58 percent.
âThe frequency of loss is down,â Silverstein said. âWe experienced that with our clients, and itâs now being recognized by the rating agencies.â As the economy improves, however, frequency could potentially climb up again alongside rising employment rates.
Medical and indemnity cost increases are also slowing down, contributing to the trend. Medical costs have risen an average of three percent, down from seven percent increases in past years; indemnity payments have risen only two percent, down from consistent five percent increases over the past 10 years.
The growing popularity of closed formularies could also be contributing to reduced medical costs, Silverstein said. Closed formularies deny coverage for any drugs not included in the program, such as brand name prescriptions for which cheaper, generic versions exist. Early results from states that have adopted them show reduced costs associated with prescription drugs.
âWe have another 16 filings to go, and they could be different,â Burton said. âEvery state is its own microcosm. But predominantly we are seeing decreases.â
NonâNCCI rated states are witnessing the same trend.
In April, the Pennsylvania Department of Insurance and Labor & Industry announced a 5.15 percent workersâ compensation rate reduction.
Pennsylvania Insurance Commissioner Michael Consedine said in a press release, âAs a result of this action, we estimate that Pennsylvania employers will experience annual savings in workersâ compensation insurance costs of approximately $140 million.â
This is the third time the state has reduced rates since 2012, saving approximately $410 million for employers. Consedine called this a âvery positive trend.â
In California, the Workersâ Compensation Insurance Rating Bureau (WCIRB) governing committee voted on Sept. 4 to reduce the rates originally recommended in its mid-August Pure Premium Rate Filing. The vote was based on the WCIRB Actuarial Committeeâs review of new insurer experience complied in late June which shows âlower than anticipated loss development in the second quarter and some moderation in the 2013 indemnity claim frequency growth,â according to a statement from the Bureau.
The amendment to the filing proposes premium rates that average $2.77 per $100 of payroll, down from $2.86 per $100 that was recommended in August. Even with the decrease, however, the new rate is $0.20, or 7.9 percent higher than the overall industry average of $2.57 as of July 1, 2014.
Some states will see much more significant decreases. Oregonâs base rate, for example, will decrease by an average of 5.3 percent next year, on top of a 7.6 percent decline in 2014. Employers will pay an average of only $1.27 per $100 of payroll in 2015, seven cents down from 2014.
As Okla. Insurance Commissioner John D. Doak said, âWhen employers pay less for workersâ compensation insurance, they can more easily grow their business, hire additional workers and expand local economies.â Over the past two years, Oklahoma has decreased its loss cost levels by about 22 percent.
Katie Siegel is a staff writer at Risk & InsuranceÂź.