Yesterday’s news release from UC Davis claiming that workers comp premium increases are due to underlying shifts in financial markets will almost certainly generate a lot of conversation.
Here are quoted highlights with my comments in (parentheses).
– a UC Davis study has found that the number of claims has dropped during the past two decades…higher premiums are instead associated with decreases in the Dow Jones Industrial Average and interest rates on U.S. Treasury bonds. (I’m not sure UC Davis is the first to note that claims volumes have decreased over the last twenty years)
– premiums increased from 1992-2007, claims decreased 1 to 2 percent each year. Claims for serious illnesses and injuries varied, but decreased overall.
– for the entire 35-year timeframe of the study, rising premium rates were closely linked with the Dow Jones Industrial Average or Treasury bonds. As either the Dow or interest rates on Treasury bonds fell, premiums rose, and vice versa.
I’ve requested a complete copy of the study and will report back when I’ve a chance to read the entire document. For now, here are a couple observations.
1. The study used OSHA reported incidents as a proxy for WC claims. As all of us involved in workers comp are well aware, there is NOT a one:one correlation. I don’t know why the researchers didn’t find – and use – the number of actual workers comp claims. While it’s a pain in the posterior to get this information, it can be found. We’ve found it for a client – it’s out there, it just takes a lot of digging. By people who know where to dig. In any event, the study authors’ conflating of ‘claims’ with ‘incidents’ may well lead others to miss this key issue.
2. NCCI’s been reporting a decline in work comp frequency [opens pdf] of much more than 1-2% per year over the same period. From 1990 to 2009, frequency dropped by about 55%…
3. It’s hardly surprising that investment returns influence premiums. The old rule of thumb is a third of claim dollars are paid out more than 36 months after a claim is incurred, making the RoI of invested premiums critical. That said, I doubt work comp payers invest a significant portion of reserves – if any – in stocks listed on the Dow. That would be rather risky.
I’ve got a few other thoughts circling around, but in fairness they’ve been triggered by other media coverage of the report and not based on a reading of the report itself. At this point, rather than react to some of the quotes in UCDavis’ news release, quotes which may need context, I’ll defer further comment till I read the entire document.
Sep
22
Aside from the apples and oranges (WC accidents versus OSHA incidents),I understand the need to read the full report and not rely on just highlighted quotes. However even without the details the premise is either disingenuous or woefully misinformed. Premiums are solely driven by loss costs. Corporate profitability 9including investment income) might impact on a carrier’s ability to write WC, but the premium charaged is directly tied to costs not investment income or corporate profits. Additionally any carrier with a decent rating couldn’t possibly be relying on the equity market for the majority of his investment income. income.