The P&C insurance industry by and large will not sufferdirectly from the huge cuts in government programs set to launch onMarch 1, but one executive at Lockton cautions that employersshould remain vigilant against questionable Workers' Comp claims aslocal economies feel the squeeze.

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

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

Hartwig says any impact from sequestration on insurers would beindirect. 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 thenumber of vehicles they need on the road.

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

“I don't expect society as we know it to disintegrate,” headds.

Yet while the impact on insurers may be limited, from arisk-management standpoint Lockton's Technology and GovernmentContract leader Michal Gnatek warns employers to watch out for suspicious Workers' Compclaims, especially non-accident soft tissue claims from employeesseeking to avoid the unemployment line or pay reduction fromfurloughs.

“Employees fearing that their paychecks are going to beseriously impacted by potential furloughs or mass layoffs could seeWorkers' Compensation as a way to continue their current salarytax-free,” Gnatek writes in a Lockton Market Update. “Much in thesame way that we advise our clients to be especially vigilant ofsuspicious lost-time claims during plant closures or largereductions in force (RIF), we strongly recommend that risk managerstreat the uncertainty of sequestration in the same manner.”

With regard to Employers Practices Liability, Gnatek adds, largedefense contractors whose budgets will be greatly diminished shouldpost warning notices of the sequester's possible job impact.Employers should also be concerned about theft, including loss ofintellectual property.

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