'Sequester' May Have Indirect Impact on Workers’ Comp Rates, Says Lockton Exec

The P&C insurance industry by and large will not suffer directly from the huge cuts in government programs set to launch on March 1, but one executive at Lockton cautions that employers should remain vigilant against questionable Workers’ Comp claims as local economies feel the squeeze.

On Friday, $85 billion in cuts to the federal budget, dubbed the “sequester,” will go into effect. Every government program will feel the pinch of lost revenue, including the military. States that are heavily dependent of federal dollars, such as Hawaii where federal spending is 15.8 percent of the state’s GDP, will feel the impact, causing localized recessions. Overall, the initial impact on the nation’s GDP could be 0.3 percent.

“I expect the net impact on the insurance industry to be very small and not be discernible when we look at first-half 2013 numbers,” says Robert Hartwig, chief economist and president of the Insurance Information Institute Inc.

Hartwig says any impact from sequestration on insurers would be indirect. The cuts could trigger a reduction in consumer spending, which could lead to less spending on items that need insurance. Premiums for commercial Auto could drop as companies reduce the number of vehicles they need on the road.

“It will be inconvenient for people,” says Hartwig of the sequester’s expected impact. “This is a political process that will end when people have had enough, make their voices heard and make their elected representatives in Washington come together and devise a reasonable funding solution for the country.

“I don’t expect society as we know it to disintegrate,” he adds.

Yet while the impact on insurers may be limited, from a risk-management standpoint Lockton’s Technology and Government Contract leader Michal Gnatek warns employers to watch out for suspicious Workers’ Comp claims, especially non-accident soft tissue claims from employees seeking to avoid the unemployment line or pay reduction from furloughs.

“Employees fearing that their paychecks are going to be seriously impacted by potential furloughs or mass layoffs could see Workers’ Compensation as a way to continue their current salary tax-free,” Gnatek writes in a Lockton Market Update. “Much in the same way that we advise our clients to be especially vigilant of suspicious lost-time claims during plant closures or large reductions in force (RIF), we strongly recommend that risk managers treat the uncertainty of sequestration in the same manner.”

With regard to Employers Practices Liability, Gnatek adds, large defense contractors whose budgets will be greatly diminished should post warning notices of the sequester’s possible job impact. Employers should also be concerned about theft, including loss of intellectual property. 

James Auden, managing director at Fitch Ratings, recently noted that P&C pricing trends are improving and loss-cost trends are stable—with the exception of medical costs pushing up Workers’ Compensation rates.


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