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Economy, COVID-19 claims lead comp market shifts

covid chart

Declining premium rates, falling payrolls, rock-bottom interest rates and uncertainty surrounding workplace coronavirus-related claims complicated mid-year workers compensation renewals, experts say.

Workers comp insurers, who have seen rates fall for several years, are wrestling with various state COVID-19 presumption laws as they strive to predict claims trends for the remainder of 2020 and into next year, experts say.

At the beginning of 2020, workers compensation continued to be an “incredibly historically profitable line of business” for insurers, said Mark Moitoso, Atlanta-based head of risk practices for Lockton Cos. LLC.

With rates hardening in other property/casualty lines, workers comp “has been one of the basic saving graces for our clients,” he said. 

The onset of the COVID-19 pandemic and uncertainty over how it will affect the comp market has affected renewals, said Debbie Michel, Boston-based executive vice president and general manager of risk management at Liberty Mutual Insurance Co.

“Exposures are anticipated on an aggregated basis to be negative through the course of the renewal cycle, which will obviously impact and impair premiums,” Mr. Moitoso said.

“What is ultimately going to be the severity of (COVID-19) claims is going to truly tell the financial burden that COVID has brought on workers comp. It’s very early to know the true financial consequences and the depth of the disease.”

Insurers are more cautious and conservative with underwriting health care and customer-facing businesses and those located in states that have expanded workers comp for COVID-19 exposures, Ms. Michel said.

In May, California Gov. Gavin Newsom issued an executive order extending workers compensation to nearly 6.8 million workers in 16 industries who may contract COVID-19 on the job. Illinois Gov. J.B. Pritzker signed into law in June a similar COVID-19 workers compensation expansion.  

“Especially on new business, we’re being a little more cautious in those states,” Ms. Michel said. “On renewals, we’re doing our best to work with clients and doing our best to continue to provide coverage.”

The State Compensation Insurance Fund based in Pleasanton, California, announced ahead of California’s executive order that it would presume that essential workers who contracted COVID-19 did so on the job. As of late June, the State Fund had covered 239 COVID-19 workers compensation claims. The only claims the insurer denied were for workers who tested negative for coronavirus, according to a spokesman. Workers compensation claims are down overall compared with last year, he said.  

“The compensability presumptions have been causing carriers to do a fair amount of analysis of their own book in terms of how they feel it’s going to impact them,” said Matt Zender, Las Vegas-based senior vice president of workers compensation strategy at AmTrust Financial Services Inc. “In some cases, it’s causing the carriers to feel that the COVID presumption is, in fact, a rate event.”

With the questions around COVID-19, helping clients accurately budget and forecast expenses for the remainder of the year and into 2021 presented a new mid-year renewal challenge, said Mike Hessling, CEO North America of Gallagher Bassett Services Inc. in Rolling Meadows, Illinois.

“What we’ve done, by industry, is attempt to forecast what we think the impact of the pandemic is likely to have on claim volumes and workers compensation … and flow those through to our projections,” Mr. Hessling said. “We are starting to see some recovery in claim volume. But on a year-over-year basis, you can certainly see the impact from the pandemic.”

While the comp sector will likely continue to see premium contraction in 2020 because of falling payrolls due to pandemic-related layoffs and furloughs, Mr. Moitoso said, the double-digit price drops the comp industry has seen in the past few years are decelerating.

Workers comp rates will likely be flat or tick up slightly in the next few quarters, but “pricing pressures are going to be an issue,” said Steve Guijarro, New York-based director at S&P Global Ratings.

Other changes in 2020 include the addition of work-from-home class codes in several states — either temporary or permanent — that may affect premium, as well as the drop in exposure from payroll shifts, Mr. Zender said.

“It’s going to take an underwriter more intellectual bandwidth perhaps than they’ve had to use in the past to make determinations … (on) how risks fit on the spectrum from good to bad,” he said. “The ones who spend time to think about it will find the ability to really thrive.”

“Very low” investment returns on reserves is another challenge for the industry, Mr. Guijarro said.

“That’s a big component of how (the industry) manages reserves, especially for a longer-tail market like workers comp,” he said.

Substantial COVID-19 losses would likely “continue to put pressure on rates in the comp environment,” Ms. Michel said. “With interest rates at all-time lows, there’s a need for more dollars coming from premium than investment income.”

More insurance and workers compensation news on the coronavirus crisis here.