At the 2022 WCRI Annual Conference, Robert Hartwig, Associate Professor of Finance from the University of South Carolina, talked about a variety of issues impacting the economy and workers’ compensation.
Inflation Overview and Impact
The current drivers of inflation are rooted in pandemic-related supply chain disruption and monetary policy changes made in response to the pandemic. The federal government passed six COVID relief bills totaling $5.7 trillion, creating a substantial influx of cash into the economy which had a very predictable impact on inflation. Inflation is also being heavily influenced by high oil prices.
As it relates to workers’ compensation, inflation has the potential to increase medical costs. However, the effects may not be immediate, and costs may take much longer to develop, especially with the lower rate of rising healthcare costs currently. The costs of goods may be influencing inflation, but the costs of services will inevitably rise in response to the increased costs of wages and materials.
In an effort to slow spending and inflation, the Fed will be raising interest rates, which could lead to an increase in investment income for workers’ compensation carriers.
Russian Invasion of Ukraine
The war in Ukraine has many potential implications on the property and casualty insurance industry, including higher inflation and an increased probability of a recession. A recession is usually tied to job loss which would adversely impact workers’ compensation. The war has also lead to an increased risk of cyber attacks and financial market uncertainty and volatility.
As of February 2022, there are still 2.1 million fewer workers employed than in February 2020. Impacting factors include childcare issues, extended and expanded unemployment benefits, and the accelerated retirements of baby boomers. The unemployment rate has rebounded to pre-pandemic rates, but the labor force participation rate is the lowest it has been since 1971.
At the peak of the 2009 recession, there were seven job seekers for every job opening. Today there are 0.6 job seekers for every available position with half of employers surveyed reporting difficulty finding workers for open positions.
Because of the tight labor market, employees are working more hours on average than they have in over 15 years. Additionally, wages are increasing at rates not seen in over 20 years.
For the first time in US history, more than half of all US adults over 55 years of age are now retired from the workforce.
Payroll vs. Premiums
Although workers’ compensation premiums are tied to payrolls, there is not a direct correlation between rising payrolls and rising industry premiums. This is due to the rates being charged fluctuating significantly based on claims costs and market competition. Thus, the current rising payrolls may not necessarily result in higher overall workers’ compensation industry premiums.
Pre-pandemic, the workers’ compensation line was the strongest and most profitable P&C insurance line of coverage. However, in terms of revenue, workers’ compensation premiums saw the most significant decline during the pandemic.