Workers’ Compensation outlook for 2016
Increases in employment growth, wage growth, medical inflation, and interest rates are all expected to have a significant impact on Workers’ Compensation premiums in the upcoming year.
Employment growth will most likely result in a rise in exposure-based premiums, and generate upward pressure on claim frequency. It is already affecting the severity by the indemnity payments that are being made on Workers’ Compensation losses. The industry reaction to the severity spike is that insurance carriers will focus their attention on job training and new employee selection.
Wage growth is expected to put more pressure on this indemnity severity. Private-sector payrolls are expected to increase due to the effects of higher employment and average weekly wage growth. If wage growth accelerates as expected in 2016, it will end a period of static or declining wages dating back to the Great Recession. This should be considered to be a positive sign. Even if initial inflationary pressure encourages the Fed to raise the federal funds rate, wage growth will indicate a healthy premium environment.
Medical care inflation is expected to outpace general inflation in the economy and cause medical costs to increase. Employees are living longer with more chronic diseases, and conditions such as diabetes, obesity, and heart disease can complicate treatments and recovery from a work-related injury. As the average age of the workforce increases, this issue will affect workers’ compensation costs even more than in the past. Identifying high-risk claims in addition to effective medical management using data analytics will play a key role in reducing medical costs and shortening the duration of claims.
Workers’ Compensation insurance carriers are among the largest investors in the bond market, with a significant part of their invested assets allocated to government and corporate bonds. Consequently, an insurer’s investment income and profit depends on the prevailing interest rates. The resulting impact of the current low-interest rate is poor profitability for Workers’ Compensation carriers. The property and casualty industry’s investment performance should be positively affected when long-term interest rates begin to increase next year. Until a definite upward trend in long-term interest rates is definitive, Workers’ Compensation carriers will remain very strict in the underwriting practice.
For more information on what to expect in the Workers’ Compensation marketplace in the upcoming year, feel free to contact Gallagher WGA’s Casualty team.
About the Author
David Bardelli is an Area Senior Vice President of Gallagher WGA in the Broker Services Division and leads the firm’s area Casualty Practice. Mr. Bardelli has extensive knowledge with casualty risks, including technology healthcare, business services, and miscellaneous manufacturing groups of all sizes.