Claim frequency dropped another 5% in 2012, continuing a 25-year trend of ever-decreasing frequency…well, except for that one-year uptick during the recession.
More tellingly, NCCI data indicates frequency has been steadily declining across all industry groups. However, this has been partially offset by a small but steady rise in medical costs. Although medical costs increased at an average rate of 5.7% from 2002 – 2011, NCCI reports trend over the last three years was substantially below that figure.
I must admit to being somewhat puzzled by this, as several clients are reporting higher increases. It could be that NCCI uses paid and estimated future medical expense (“developed to ultimate”) while the payers I work with look at paid data (when we project medical costs). Nevertheless, we are seeing medical trend rates in the mid to upper single digits, driven by facility costs.
One area of interest is the oil and gas industry, where employment has been steadily increasing over the last five years. Yet the frequency trend has been down in all but one segment of this industry, mirroring overall trends. Overall, payroll is up 16% in that time, while frequency declined over 20 percent; notably severity increases more than outweighed the positive effect of the drop in frequency, as costs were up 22%.
So, what does this mean?
First, frequency is continuing its decline, however I’d expect the rate of decline to decrease over the next couple years. Second, severity – NCCI estimates are it is in the low single digits, while I see it as significantly higher. I think the key is in the methodology. NCCI bases severity on a projection of what today’s claims will ultimately cost while my admittedly-anecdotal information is based on what’s actually been paid.
The net – as employment trends up (if the morons in Congress don’t find some principled-but-stupid reason to refuse to increase the debt ceiling) the number of claims will too, partially or completely off-setting the frequency drop. And medical costs are going to increase.