After a 7-Year Run, will Workers’ Compensation Rate Decreases End?

Since October 2017, the New York Compensation Insurance Rating Board has been filing for annual decreases in loss costs, which form the basis for the insurance rates that are charged by workers’ compensation insurance carriers.

President Lovell Safety Management Co., LLC.

This year’s proposed rate filing of -2.6 percent follows last year’s adopted -8.7 percent change. And prior years saw these decreases:

● 2021: -6.4 percent

● 2020: -1 percent

● 2019: -10 percent

● 2018: -11.7 percent

● 2017: -4.5 percent

Based upon the decrease in loss costs, one might assume that the last seven years saw a consistent improvement in safety that produced a reduction in the cost of claims. Indeed, Rating Board data show that accident frequency did decline over the last few years, hitting a low point during the pandemic year of 2020.

In the most recent years for which we have data, however, accident frequency has started to creep up. But that is not the whole story. While overall claims counts have been decreasing, the cost of those accidents has been increasing. Here again, the pandemic year seems to be an inflection point as the October 2023 rate filing shows a very slight downturn in claim severity beginning in 2020.

So, while there have been improvements in accident experience, they account for only a portion of the seven-year trend, contributing primarily to decreases in the oldest two years of the seven, 2017 and 2018. Each rate filing looks at the two most recent years’ loss data. For example, this year used data from policies that were incepted in 2020 and 2021. In three of the last four loss cost filings, recent experience suggested decreases, but by 1.7 percent to 3.8 percent, far less than the decreases incorporated into the loss cost filings.

Another factor accounts for the decreases.

The key driver of loss cost decreases for the last several years has been growing wages. Remember, the cost of insurance is charged as a rate per $100 of payroll. If wages increase, and the cost of claims remains constant or decreases, then the rates charged on policies should decrease. It is the wage trend that has been putting downward pressure on loss costs. In the four years prior to the 2023 rate filing, the future trend has averaged -6.2 percent.

With all the attention being paid to inflation, one might have anticipated this trend to continue this year - but it did not. After increasing by 10.0 percent in 2021 and 5.9 percent in 2022, the statewide average weekly wage (AWW) grew by only 1.8 percent to $1,718.15 in 2023. When the latest wage data was run through all the actuarial projections it indicated a -1.7 percent impact on loss costs. Last year, the same factor was -6.3 percent.

Here again, the data seems counter-intuitive. Why would the AWW increase by a very dramatic 10.0 percent and 5.9 percent during the unprecedented coronavirus-driven increase in unemployment? And why, during a period of significant inflation, would we see such a small increase?

The answer seems to be that the AWW is not a great way to measure the wage experience of most state workers. During the pandemic years, the average was driven up by the changing composition of the labor force, as low-wage service workers were laid off, while higher-paid white-collar workers tended to retain their jobs. With a smaller number of low wage workers, the higher paid workers drove up the average. By the same token, the Labor Department believes that the decrease in the average for 2023 was driven by lower bonuses for Wall Street workers.

With so much of the pricing of workers’ compensation insurance riding upon such fickle data, we might wonder just how accurate the loss costs developed in the post-pandemic years will prove to be.

The recent decreases, however, have been a bright spot for employers at a time when other costs are increasing. Unfortunately, reductions are not likely to continue.