Workers' Compensation Claims Continue Frequency Decline

A key market issue facing employers and workers' compensation insurers is whether the large declines in claim frequency that began in the 1990s are likely to continue, according to the National Council on Compensation Insurance.

In late 2003, research by the council showed a decrease in on-the-job claim frequency for workers' compensation injuries. Revisiting the issue in 2004, NCCI reported that the 2003 trends continued, with the reduction most pronounced for smaller claims. This has contributed to increasing average medical and indemnity severities, however. In fact, medical severity experienced double-digit increases during 2004, with indemnity severity experiencing significant increases, as well, the report noted.

The decline in frequency of workers' compensation claims spanned almost all occupations. In particular, several occupations in the goods and services industry (such as hotels and charitable/welfare organizations) had much greater declines in frequency than other occupations.

Some regionalization became apparent, with northeastern states experiencing the largest declines (34 percent) in claim frequency since 1997. Although the remaining states experienced smaller frequency changes, they still had declines of more than 20 percent during that same period. Over the last three years, Midwestern states experienced average declines of almost 15 percent, while other regions had average declines between 12 and 13 percent.

Significant slowing occurred in fatal, permanent total, and permanent partial claim frequencies, belying the theory that observed frequency declines are largely due to a drop in the reporting of relatively minor claims. Smaller lost-time claims have experienced a larger decline in frequency than larger lost-time claims. This relatively larger decline causes severity trends to be higher than would occur were increases in severity due only to increases in prices and utilization.

Even though small employers tend to experience greater frequency relative to payroll, almost all employer size ranges have had similar percentage declines in frequency. Policies with and without large deductibles experienced comparable frequency declines.

Policies with high experience modification factors showed the most improvement in claim frequency. Presumably, those employers with low experience modification factors had already done much to prevent workplace injuries through implementation of workplace safety programs. Not only can a lower claim frequency decrease workers' compensation premiums, it can increase workplace efficiency, the study's authors noted.

Among the many factors that NCCI believes are driving the downward trend are continued emphasis on workplace safety in all employment classes; increased use of robotics, modular design, construction techniques, and power-assisted processes; advances in ergonomic design; proliferation of cordless tools; more and better job training; and improved fraud deterrents.

In the last few years, indemnity and medical severities have continued to increase, following a relatively stable period from 1991 to 1995. The flat severity trend during that time was mainly a result of the industry's substantial reform and cost-containment efforts in the early '90s. Once those reforms reached their full effect, indemnity severity began to rise, increasing at an average annual rate of 7.4 percent since 1996. While indemnity severity rose 7.3 percent in 2001 and 6.0 percent in 2002, NCCI estimates that this rate of increase slowed slightly in 2003, with indemnity severity rising 4.5 percent.

Medical claim cost trends continue to be alarming, NCCI notes, with double-digit increases in the three most recent years. Medical severity increased 12 percent in 2001, an additional 11 percent in 2002, and 9 percent in 2003. In addition to medical price inflation, increases in the utilization of medical services (including prescription drugs) are a major driver of the increase.