Economics of Workers’ Compensation

At the 2019 NCCI Annual Issues Symposium, Robert Hartwig, Professor of Finance from the University of South Carolina discussed how the economy is impacting workers’ compensation. The highlights:

• The economy and workers’ compensation are strongly linked. Higher employment leads to higher payrolls which is the basis for premiums.
• We expect 2.6 million jobs to be created in the United States during 2019.
• The unemployment rate is currently the lowest it has been in 50 years and it is expected to remain low.
• The workers’ compensation line was greatly impacted by the recession back in 2006-2010. The decline in premiums was more than double what was seen in any other line of coverage and this was linked to the severe decline in payroll.
• We are currently in month 119 of economic expansion and next month we will tie the record for the longest economic expansion in our countries history.
• While consumer confidence remains high, it has dropped from late 2018 because of uncertainty in the financial markets.
• New construction starts dipped slightly so far in 2019 likely due to slightly higher interest rates.
• Not only are new people being brought into the workforce, but people who were working part-time before are now finding full-time jobs.
• In 2019 we saw the highest wage growth in 20 years and the wage growth continues to accelerate. Because of the low unemployment rates, employers are having to compete more for workers.
• Worker productivity is also picking up which also is tied to higher wages.
• Approx 2.3% of workers will quit their job this year because they found better jobs.
• The number of long-term unemployed is the lowest level since the recession.
• The number of new job openings is up 214% since the recession.
• Today there is less than one person per each job opening. Compare that to the recession when there were 7 people for each job opening.
• The minimum wage also factors into workers’ compensation. 22 states increased their minimum wage thus far in 2019. This is billions of additional payroll that translates into more workers’ compensation premiums.
• The labor force participation rate dropped during the recession and has really not picked up. Much of this is attributed to people choosing to retire earlier.
• Investment performance is a key driver of insurance carrier profitability. However, this issue remains challenging. The stock market has been volatile the last two years driven much by the threat of trade wars.
• End of the year volatility in the stock market caused the P&C surplus levels to drop at the end of 2018.
• The fed indicating they will not take further action on interest rates which will keep the bond market yields low.
• The lower investment marketplace has led to much stricter underwriting guidelines from carriers as they cannot make up for poor underwriting with investments.
• Bond yield curves remain low with very little difference between the yield on 2 year and 10 year bonds. This discourages long-term investment in the bond market.
• If there is any significant government investment in infrastructure that would greatly benefit the workers’ compensation industry because that is tied to lots of high wage employment. However, right now there is no way to fund this in the Federal budget.
• If the trade war with China continues and escalates, it could have a very negative impact on the overall economy which could lead to job losses in certain industries. The biggest industries at risk are those that produce goods for export.