How the Gig Economy Is Upending Worker’s Comp
The question of whether gig workers are employees or independent contractors has implications for Workers' Compensation insurance.
In a world swimming in inflation, it feels comforting to know that healthcare prices tend to be less volatile than most consumer prices.1 Medical inflation isn't synonymous with the overall inflationary forces measured by the consumer price index (CPI). Medical inflation has only increased at roughly half the rate of overall CPI over the last few years.
In the last two decades, healthcare prices have risen between 1% and 5% each year.
Though a steady increase, every year adds up. Whereas the price of consumer goods and services increased by 80.8% since 2000 according to an analysis of Bureau of Labor Statistics (BLS) data by Peterson KFF), the price of medical care — including services provided, insurance, drugs and medical equipment — has increased by 114.3%.2
In other words, medical inflation is the turtle that ultimately wins the race of the greatest overall increase relative to the fluctuating inflation of consumer goods.
For insurance carriers, medical inflation and the rising cost of care are translating to more expensive care and more expensive claims. While the frequency of Workers' Compensation claims is trending lower, the severity of claims is trending up, rippling through the market as carriers brace themselves for impact.
The Workers' Compensation insurance market remains profitable and popular for US insurance companies, boasting capacity and competition despite rate and premium decreases.
There's concern within the industry, however, about the rise in the severity of claims. Medical claim severity rose about 5%, and indemnity claim severity increased about 6% over the last year, which remains a "manageable" increase, according to the National Council on Compensation Insurance (NCCI).
Though "manageable" now, rising healthcare costs and inflation might not be manageable forever.
Using technology allows carriers to operate more efficiently, reducing overhead and improving decision-making, which lowers expenses.
According to Mark Williams, executive vice president in the UW Work Comp Division at Atlas General Insurance Services, it's imperative for carriers to reduce expenses as much as possible by leveraging technology and data analytics in anticipation of rate increases in the soft market.
Telehealth and telemedicine, which expanded rapidly on the heels of the pandemic, reduce Workers' Compensation medical claims costs. Telehealth offers the benefits of almost instantaneous treatments, more personalized healthcare, improved medication access and improved mental health support.
While there's an increase in claim costs, technology is helping to offset the increase for the time being.
COVID has increased worker risk, adding vulnerability in jobs that weren't previously considered dangerous. This introduced new Workers' Compensation exposures associated with disease, illness and disability. Companies are counteracting this increase by effectively adapting — offering telemedicine, for example — and promoting safer workplaces.
For example, fatal accidents in the US agriculture industry dropped by 11% between 2020 and 2021, and nonfatal workplace injuries and illnesses reached a new low of 2.6 million that year, down from nearly 3 million a decade earlier, according to the BLS.3
The overall reduction in claims frequency is the result of new safety technologies, improved loss prevention and improved company culture as it relates to safety and trust. Healthier, safer workplaces translate to both increased productivity and lower insurance costs for companies. Lowering insurance costs is a strong motivator, says Williams.
Over the last five years, Excess Workers' Comp has remained fairly stable, according to Rafael Olivares, RPS area vice president for Excess Workers' Compensation. In the mid-2000s, the market was significantly less competitive than it is today, says Olivares.
Excess Workers' Comp is more removed from loss and is longer term, making it more stable than the broader market. The increases in interest rates make this line even more attractive, because it offers potential investment income.
The redundant claims reserves reached $17 billion over the last year, an increase that Patrick Edwards, RPS area senior vice president and Workers' Compensation practice leader wasn't anticipating.
Considering the downward trend of frequency, one might expect a decrease in reserve redundancy. It makes sense to build in some cushion to offset the potential for deficiency, but building too much cushion prevents carriers from investing and capitalizing on the current market rates.
This trend is different from roughly five years ago when carriers preferred a deficient claims practice, says Edwards.
Learn more about what's next for the Workers' Compensation market in the RPS 2023 Workers' Compensation Market Outlook.
1"Unpredictable Costs: How Will Healthcare Inflation Impact Workers' Comp?" Healthe Systems, accessed 7 Nov 2023.
2Amin, Krutika et al. "How Does Medical Inflation Compare to Inflation in the Rest of the Economy?" Health System Tracker, 26 July 2023.
3"Industry-Level Data from the Survey of Occupational Injuries and Illnesses," US Bureau of Labor Statistics, accessed 7 Nov 2023.