Recession May Cut Comp Claim Frequency

Injury "frequency, it turns out, is really the key driver of claim costs…so typically as you move into a recession, you see claim costs easing a bit," Mr. Shuford said.

This is different from what many people might intuitively anticipate, "that hard times in the economy translate into hard times anywhere; that is not entirely true with workers' compensation," he said.

In a briefing paper on the subject, Mr. Shuford advised that "conventional wisdom" that anticipates increases in frequency of losses as unemployed workers begin submitting claims is wrong. Indeed, workplace injury rates fell in six of the seven recessions since the early 1960s, and when the economy came back up "in five of the six expansions, it rose," he wrote.

Mr. Shuford said the workers' comp premium is sensitive to employment changes in key high-rate sectors–particularly the cyclical areas of construction and manufacturing.

The plunge in construction employment in the past year, he wrote, will probably be reflected in slower growth, if not outright declines in workers' comp premium.

Mr. Shuford found that while events such as plant closings and large layoffs do result in clusters of claims, evidence suggests this is unlikely to play a major role in frequency patterns–reflecting the U.S. economy's dynamic nature, where large layoffs happen frequently.

The decline in frequency rates when the economy sinks is attributable to various factors, but Mr. Shuford explained the most important is that "as the economy moves into recession, employers typically lay off their newest hired, least-experienced workers"–who, he noted, are more likely to be injured on the job.

Injury frequency fell or declined faster during the three most recent recessions, and there is every reason to believe this downward pressure will be observed during the current economic downturn, the economist stated.

His study found that data from the past three recessions suggests the key driver of indemnity severity is the slowing of the growth in wage rates, and that this impact extends a year or so beyond the end of the recession as state benefit levels adjust to the previous year's average weekly wage.

Asked if there were any indications that workers' comp experience in the current economic decline would be different from prior events, Mr. Shuford noted that "this recession is already the longest downturn since the Great Depression. We are seeing a strong impact in the labor markets, which might mean if it continues for an even more extended period of time, the downward pressure on frequency we've seen in previous recessions might be less pronounced. But that's largely speculation, because during the Great Depression we saw a marked decline in injury rates."

Concerning the recession's impact on the residual market for workers' comp coverage, Mr. Shuford's briefing for regulators noted that in the 1980s, the residual market grew in response to market losses. Since then, however, the residual market has grown following recessions and decreased during recovery.

In an additional presentation scheduled here, Frank Schmid, NCCI director and senior economist, was to present statistical evidence that elevated job destruction during recessions slows the decline in accident frequency, but the magnitude of this effect is smaller than the opposing effect of depressed job creation.

Indeed, the decline in accident frequency accelerates during recessions due to the decline in the rate of job creation, he found.