This report was first published by Insurance Business America

The workers’ compensation market is thriving after several years of unparalleled results. Even amid the COVID-19 pandemic, workers’ compensation remains one of the most profitable segments within the US P&C insurance industry. As a result, the market is attracting new carriers, programs and insurtech companies that continue to drive competition and put pressure on rates.

According to the National Council on Compensation Insurance (NCCI), net written premium in the workers’ comp market dropped by 10% to $42 billion in 2020, a decline largely attributed to job losses and shrinking payrolls during the pandemic. Despite that, the NCCI’s 2020 State of the Line report confirmed the profitability of the industry – private insurers posted a calendar year combined ratio of 87%, marking the fourth straight year with a combined ratio below 90%. The reserve position for private insurers also remains strong, with a redundancy of $14 billion as of December 31, 2020.

“I think there’s plentiful capacity in the workers’ compensation market right now,” says John Beckman, Chief Underwriting Officer at QBE North America.

“It’s a healthy market that has continued to benefit from a reduction in claim frequency. That reduction is, of course, due in part to COVID-19 because fewer workers have been on the job, but more so I’d say that employees are simply safer at work than in the past.”

Despite the resilient market, the workers’ comp system has faced some unprecedented challenges from the pandemic. When the impact of COVID-19 became clear and states started to issue public health guidance and stay-at-home orders, many carriers had to scramble and reposition some underwriting standards.

“Many class codes, especially those in high-contact industries, were evaluated to determine whether they could be under-written safely,” says Matt Zender, SVP of workers’ compensation strategy at AmTrust Financial Services.

“Carriers also quickly had to pivot to create protocols to allow for appropriate absorption of regulatory changes, many of which were occurring rapidly and disparately, as individual states varied in their approaches. Additionally, carriers had to complete extensive reviews of their claims operations to ensure that changes to compensability presumptions were contemplated properly.”

The NCCI reported more than 45,000 COVID-related claims in 2020, and more than 95% of those cost less than $10,000. Hardest hit were workers in nursing homes, hospitals, clinics and other healthcare settings, along with first responders, which together accounted for 75% of claims. Carriers reported $260 million in total COVID-19-incurred losses in 2020; the costliest 1% of those claims accounted for 60% of pandemic-related losses.

The potential longer-term impacts of the pandemic remain to be seen. According to Andy Shaw, EVP and Managing Partner of PMC Insurance Group,

“how quickly the recovery of getting payrolls back to the first quarter of 2020, how those workers who did get COVID with long-haul symptoms fare, and the ultimate impact of the claims costs, along with the employment shift to a higher level of remote workforce and the rapid hiring of the on-demand industry, will all be important factors for long-term impact.”

There have also been major advancements in workers’ comp technology, from the use of videoconferencing for loss assessment and risk management to digital product distribution, virtual claims assessments and telehealth services. Employers are also using technology such as wearable devices and ergonomics programs to create safer work environments.

“While this is only speculation, you can expect insurance carriers in the future to offer premium discounts for a company to implement a wearables program, like auto insurers offering safe driving discounts for the plug-in ‘snapshot,’” says Glenn Backus, Chief Business Development Officer of Claims Solutions US at Davies.

Suffice to say, there’s a lot going on in the workers’ comp market, and there are more challenges to come as the workforce continues to evolve and the impacts of emerging risks like the gig economy and legal cannabis are realized. What’s promising is that the market has come through a global pandemic almost unscathed, so the odds look favorable for future success.

How would you describe the current state of the US workers’ compensation market?

Matt Zender: The workers’ compensation market continues to be a profitable segment within the P&C industry. After several years of unparalleled results, we see a great deal of capacity entering the market. Most of that is in the form of new players attempting a different approach to the distribution of their products.

Offsetting the impact of these new entrants is a fairly broad opinion that the rates in the industry have reached the bottom. There is a sense that the rates can only go so low, and some of the factors that have allowed for this drop – such as decreasing frequency and industry shifts – cannot be expected to carry rates down much further.

John Beckman: I think there’s plentiful capacity in the workers’ compensation market right now. It’s a healthy market that has continued to benefit from a reduction in frequency. That reduction is, of course, due in part to COVID-19 because fewer workers have been on the job, but more so I’d say that employees are simply safer at work than in the past. Workplace safety has vastly improved, and that is being reflected in what companies pay for their coverage. NCCI recently reported an 87% combined ratio for the calendar year 2020, and NCCI’s estimate for accident year 2020 is 89%.

Andy Shaw: The workers’ compensation market has remained stable overall, and based on the strong combined ratios in the comp market that we have seen over the past few years, I expect that rates will remain competitive. Although our carrier partners have communicated that they want to push for flat to moderate rate increases, we just have not seen it as a whole.

In addition to the competitive workers’ compensation market, there are a number of new carriers, programs and insurtech companies that continue to add capacity and drive competition, which ultimately puts pressure on rates. Overall, capitalization of property & casualty insurers remains strong, with some of the lowest combined ratios in workers’ compensation history. Given that, plus the fact that total claims frequency has been lower in 2020 than in 2019, it’s hard to believe that we will see increased rates in the near future.

Glenn Backus: Speaking from a claims perspective, it is apparent that the US workers’ compensation market is in a state of flux. Businesses are working hard to make the workplace safe for their employees, accommodating ever-changing working conditions in response to COVID and government mandates. In addition, they are facing hiring challenges, as many workers are reluctant, for various reasons, to re-enter the work-place. This uncertain environment has caused a reduction in the frequency and severity of workers’ compensation claims.

Opioids have also had a negative impact on workers’ compensation, creating a delay in return-to-work, thus driving up indemnity spend, medical spend, increased claim duration and a need for psychosocial intervention, which is resulting in overall higher costs and rate increases. Before COVID, states had been taking a proactive approach to combat opioid abuse, but that was quickly cast aside once the pandemic began.

What were some of the immediate impacts of the COVID-19 pandemic on the workers’ comp industry?

Matt Zender: The most immediate impact of COVID-19 on the workers’ compensation system was a quick repositioning of some underwriting standards. Many class codes, especially those in high-contact industries, were evaluated to determine whether they could be underwritten safely. Carriers also had to pivot quickly to create protocols to allow for appropriate absorption of regulatory changes, many of which were occurring rapidly and disparately, as individual states varied in their approaches. Additionally, carriers had to complete extensive reviews of their claims operations to ensure that changes to compensability presumptions were contemplated properly.

John Beckman: Initially, the pandemic did lead to reduced premiums because there were fewer employees working and thus less payroll. After that came clarification in occupational disease laws concerning when an employee who contracted COVID-19 would be eligible for workers’ comp benefits. For example, many states made statute changes specifically to address what happens if an essen-tial worker like a doctor or nurse got sick from COVID-19, which was important to ensure prompt delivery of benefits when due.

It’s also worth noting that most COVID losses are primarily in the retirement community and are not work-related. According to NCCI, only $260 million of COVID claims have been reported for workers’ compensation.

Glenn Backus: As employers were forced to close their doors, operate at a minimum capacity or allow their workers to work remote, claim frequencies dropped as much as 50% industry-wide. We also saw a decrease in severity. Only those essential workers were allowed back in the work environment in the early days of COVID. Now, as more states open back up and curb their restrictions, businesses are having to adjust to a changing consumer, changing buying habits and a reluctant workforce. It’s difficult to gauge the ‘new normal,’ but the employer/employee relationship has certainly changed.

From the claimant’s perspective, in the early days of the pandemic, non-COVID-related injuries saw a delay in treatment due to the inaccessibility of hospitals and provider offices, delaying the return to work and generating higher claim costs. This forced many employers, TPAs and carriers to quickly adapt, offering telephonic nurse triage and telemedicine services so the injured employee could quickly speak face-to-face with a medical provider to get the care they needed.

Andy Shaw: Outside of the initial panic of the unknown and disruption of the workplace, driving many employers to close their operations or to jump into a remote workforce, the marketplace continued to stay competitive. Carriers were focused on working with policy-holders, offering renewals and making payroll adjustments to accommodate the economic impact COVID had on business owners. As a result, we saw some of the highest renewal retentions within PMC’s history.

The COVID pandemic presented and continues to present several unique challenges, including the shifting of many industry sectors. For example, some that were not typically considered hazardous were all of sudden deemed dangerous for workers. For others, their place of employment was considered essential, such as grocery stores, mass transit, healthcare, even insurance agencies. By expanding the essential worker status and the states that have passed presumption rules, that has placed the burden on employers and insurers to prove that the infection was not work-related, making it easier for those workers to file successful claims, even if the exposures did not happen through the workplace.

Another challenge includes state policy-makers making executive orders and other administrative policy changes that directly addressed workers’ compensation coverage and claims compensability rules for COVID. Carriers still are waiting to see how states are going to rule on these legislation rulings to determine how they are responding and project the impacts that COVID has on their workers’ compensation portfolios.

What are some of the potential longer-term issues to arise out of the pandemic?

John Beckman: It remains to be seen what changes will be permanent in the long term, but one thing we are keeping an eye on is overall changes to workplace environments. I’d say the real thing to watch is how the leisure and hospitality industries will recover.

Matt Zender: Many of the long-term impacts are still being worked out. It is reasonable to expect that there will be some. Telehealth, for example, has seen an increase in use, and that should only continue as the industry has seen how it can be usefully applied.

From a medical perspective, the impact of COVID-19 is formative. Long-term issues relating to permanency are not known. Health and safety have been placed under pressure as the capacity to avoid a traditional workers’ compensation injury has been somewhat temporarily displaced by efforts to reduce and prevent exposure to COVID-19. Whether this will result in an increase in claims due to a lack of focus is not known. However, if there is some increase in this area, it appears that shifts in workplace demo-graphics away from hazardous exposure have been offsetting those.

Glenn Backus: While we can speculate what might happen, many experts agree that COVID will have a lasting impact on the workforce. Many employers learned that the workforce can perform their work remotely, utilizing advances in technology. Many employers also learned to automate tasks utilizing artificial intelligence, robotics, etc., to replace workers. As long as this new technology satisfies the customer, it may be here to stay.

Employers have also had to alter the work environment by adding barriers to prevent the spreading of the virus from employee to employee. Employers are using creative ways to entice or motivate their employees to get the vaccine without trampling on their freedoms.

Early studies have indicated a psycho-logical impact from the pandemic – government shutdowns/isolation, etc. – resulting in an increase of drug and alcohol dependency. While it’s too early to know, this could have a long-term impact on worker productivity and overall mental health, as well as injury relapses.

Because this is the first pandemic in modern history, it’s still unknown how this will impact workers’ compensation regulations. Many states are challenging various cases in the courts, and while the outcomes are uncertain, there is little doubt that COVID will set a legal precedent and case law for years to come in workers’ compensation.

Andy Shaw: Although the pandemic did not have the initial claims impact that many thought it would, there are still many uncertainties out there. In terms of longer-term impacts, that remains to be seen. How quickly the recovery of getting payrolls back to the first quarter of 2020, how those workers who did get COVID with long-haul symptoms fare, and the ultimate impact of the claims costs, along with the employment shift to a higher level of remote workforce and the rapid hiring of the on-demand industry, will all be important factors for long-term impact.

How have customer demands changed in workers’ comp? Is the industry doing enough to meet these expectations?

Glenn Backus: Customers learned that they can shop from the safety of their home without venturing outside. This convenience forced companies to change the way they deliver their products and services to their customers. We have seen delivery companies dramatically expand their fleets to accommodate this surge in online ordering. We have seen most restaurants offer curbside delivery and takeout, including alcohol sales, to adjust to consumer demand. Technological advances are leading some companies to take drone delivery from concept to reality.

The consumer has an insatiable appetite for increasing bandwidth to accommodate working – and playing – from home. Employers have had to alter their employees’ roles and responsibilities to meet the consumer’s needs, which has forced insurers to re-evaluate work-place risks.

Matt Zender: Out of the gate, it appears that the industry has responded very well to a dynamically changing landscape. There seemed to be a collective understanding of the need, and a hereto-fore disconnected community worked in relative lockstep to address that. From an employee perspective, denial rates were lower than expectations. From an employ-er’s perspective, regulator guidance was clear and was followed. This allowed employers to focus their efforts on making sure that their business was healthy and that they addressed employees’ needs. As the needs of both change into the future, the industry must maintain diligence to ensure it continues to meet those needs.

John Beckman: As demands have changed and grown, the industry has been fairly adaptive. For example, there is now a way to pay premiums called ‘pay as you go,’ meaning each month employers can tie their premiums to their payroll roster for that month and only pay what is necessary. This is especially helpful for smaller businesses, which didn’t have as many employees working during the pandemic. This allowed them to save funds – they didn’t have to pay more out of pocket and then wait for the audit money back at the end of the year. Instead, they were able to save that money at the time, helping them to stay afloat.

Andy Shaw: The pandemic, I believe, has accelerated the move for many organizations to upgrade their digital/web-based service offering. Customers [and employees] have become very accustomed to using videoconferencing, working in a virtual/remote office setting, and this could create an expectation that people be available at all times, which can put a strain on our employees.

However, these changes also allow us to service and see – albeit virtually – our customers more. Our customers want instant access to their policy information, access to team members and an ease of the business transaction. The industry is certainly responding, although never fast enough. We are seeing many changes occurring as our carrier partners try to meet the demands of customers and the industry overall. Most of our carrier partners have been enhancing their digital presence with improved policy servicing/claims websites, creating access to their platforms through API integrations, easing rating and quoting engines, etc.

The industry must meet the demands, as those that don’t change or keep up with the advancements will be left behind. At PMC, we have responded by delivering technology solutions that make it easier for our agent partners to deliver more value to their customers.

How would you like to see the workers’ compensation claims space evolve in the coming years? What are some pain points that need fixing?

Matt Zender: In the workers’ compensation space, the biggest need when it comes to claims is the relationship between the claimant and the carrier, which is too often adversarial. There are opportunities to build bridges between the two sides and be thought of more like a benefit and less like compensation. This subtle difference can change the way both sides view each other.

From an injured worker’s perspective, the concept of a ‘claimant’ intimates that someone is requesting or ‘claiming’ something – perhaps something that isn’t theirs. From a carrier/employer perspective, the concept of an ‘adjuster’ presumes that their role is to reduce or ‘adjust’ something, almost always in a downwards manner. We can change this narrative.

Andy Shaw: I would like to see wide-spread adoption of technology, such as telehealth and telemedicine, to help provide injured workers with instant treatment, easy access to medication, personalized care and time savings by not having to visit the doctor’s office. [This] could all help injured workers return to their jobs more quickly. In turn, that could also help to reduce total medical costs and claim costs.

[There are] a couple of pain points that need fixing. First, the redefining of the workers’ compensation claim – presumptions for COVID-19 are just the latest example of how workers’ compensation continues to expand beyond its original intent of covering only traumatic accidents in the workplace. As more conditions and diseases are deemed work-related and more presumption laws are passed, [it] creates confusion on what is compensable or not.

Another area is the impact of the legalization of marijuana. With approximately 15 states plus DC having legalized recreational marijuana, and 35 states plus DC having legalized medical marijuana, states continue to actively address marijuana issues while marijuana remains illegal at the federal level.

John Beckman: From a claims stand-point, technology has helped improve the way we do business in several ways. We can now use analytics in different ways to increase efficiency and improve the outcome, helping find the best care for a person who is injured. For example, in a given geographic area, we can use analytics to pinpoint which doctors are best for treating specific injuries. We can also use analytics to also assign a more experienced claims adjuster if a case is more complicated. The use of analytics really started by trying to identify fraud and has blossomed from there.

In terms of pain points, while not as prevalent, there are still issues with pain management and medications prescribed by doctors to treat injuries. We must remain vigilant to ensure injured employees are receiving the most appropriate forms of pain management, medication or other-wise, while using all available tools to prevent harmful treatments.

Glenn Backus: The COVID environment gave a boost to telehealth, which is likely here to stay. While telehealth won’t take the place of an in-person medical visit – whether it be with a doctor, hospital or other specialist – it will supplement and complement in-person visits, improving productivity and care. As employees and employers get more comfortable with the concept of telehealth, further technological advances will improve service delivery and acceptance.

The industry must adapt more quickly than in years past. Insurtech startups are adept at identifying niche needs and offering insurance products to meet those needs. Old line insurers will need to change to respond to a changing work environment.

How can insurers make better use of technology to improve their workers’ compensation offerings?

Andy Shaw: Improve personalized insurance decisions using IoT and other web-based applications to provide under-writers with more tools to enhance the underwriting decision process and pricing of a policy coverage term. Expand API integration access for easier exchange of data. Continue to leverage advances in artificial intelligence – for example, detecting insurance fraud, reducing claim costs and mining voice data to enhance the policyholder’s experience.

John Beckman: Analytics is one way, but also technology in the loss control space – we have software you can down-load to your phone to record someone doing their job to assess if they are doing it correctly and ergonomically or have the potential be injured from their day-to-day work. From there, you can find ways to relieve stress.

Matt Zender: Insurers have been historically slow to adapt and adopt. This is changing. Most notably, insurers are seeing the value of Big Data and how they can use this to influence claims, under-writing and operations. By applying their own and industry data, the insurance community can improve what we can extend to our policyholders. For example, certain insureds may be able to merit a more seamless premium audit experience without exposing the carrier to additional credit risk.

Glenn Backus: Technology has had a huge impact on the workers’ compensation market, creating a safer, more efficient workplace; COVID has accelerated this transformation into warp speed. If a percentage of workers can be just as productive from home as in an office, then employers can significantly reduce workspace – and real estate costs – and employees. Employees, in many cases, can be more productive by cutting commute times alone. Employers will need to make sure their employees have the tools they need to meet their work demand from home.

Even though technology will positively impact the work environment, insurers must never forget that the human relationship still exists and is more important than ever. All the change will create uncertainty and anxiety among the workforce. Insurers must continue compassionate care to treat the injured or ill employee and get him or her back to work as soon as possible.

How can employers use technology to improve their risk management?

John Beckman: One great way is through automating some processes to save employees from being injured or straining themselves through difficult or repetitive lifting.

Matt Zender: There are many emerging players in this space, and they will continue to help employers and employees reduce incidents at work. The first challenge in this space is finding wind-shield time. Much of this technology can have a dramatically positive impact – but only if used and used properly. Employers need to think truthfully about whether they would utilize the technology.

These technologies, and the accident avoidance that they can promulgate, will be among the larger changes in the workers’ comp space over the next decade. Those who can adopt and fully utilize these technologies will gain a major advantage over their competition.

Andy Shaw: Technology can enable employers to improve many aspects of their risk management program, from improved incident reporting, OSHA record-keeping, leave and medical management, employee safety monitoring, training and reporting, and ultimately managing and reducing their workers’ compensation costs.

Wearables, which are still in their infancy in the workplace, can provide early hazard detection, instant communication and emergency response. And 3D visualization technology can allow employers to train employees on their workplace surroundings and related hazards while they are still in a classroom setting.

Glenn Backus: Employers can utilize technology to create a safer work environment, from further automation of repetitive tasks to creating a more sterile work environment using UV technology to rid the workplace of nasty viruses, including COVID. The current workforce shortage will force employers to utilize artificial intelligence and robotics to fill those positions once staffed by workers.

Wearables in workers’ comp are in their infancy, but more and more employers across the nation are piloting an ergonomics program with the goal of improving work safety. The wearables are smart watches or any device with smart sensors worn on the body. The devices allow companies to monitor and analyze movements, but also vibrate or alert the employee when a specific range of motion is exceeded or an increase in lifting is detected. While this is only speculation, you can expect insurance carriers in the future to offer premium discounts for a company to implement a wearables program, like auto insurers offering safe driving discounts for the plug-in ‘snapshot.’

What other emerging risks could impact the workers’ compensation space?

Andy Shaw: The obvious one at this time is the short- and long-term effects of COVID, from the cost of claims to regulatory impacts to ultimately the change to the employment landscape. Medical marijuana/legalized marijuana and the shift in gig employment all have regulatory, claims adjudication and underwriting issues that have to be addressed, as they continue to create havoc within the industry.

John Beckman: I’d say one of the biggest issues will continue to be health-care costs and related inflationary effects. When the market first emerged and you looked at the claim dollar, it was prob-ably two-thirds lost wages and one-third medical costs, but now it has flipped. The increase in the cost of medical care can be a difficult aspect to manage, making innovation, along with use of traditional managed care tools, a priority.

Glenn Backus: While entities have done very well to respond to the COVID environment, it’s not a matter of if but when the next virulent strain will occur. Entities must take this time to reassess their work environment, learning from the COVID impact to better prepare for the next outbreak.

The industry must also acknowledge that the changing work environment has created new stressors for the employee. Many employees are having a hard time coping with working from home, separating their home and work life, and adjusting to the seemingly endless hours of video calls and meetings throughout the day.

While it may be too early to tell, an emerging risk on the horizon is the ever-increasing legalization of marijuana and the decriminalization of ‘hard’ drugs in certain states. This could potentially have an impact on not only an increase of future work-related injuries, but also the determination of compensability under revised case law.

Matt Zender: The workers’ compensation space has proven to be very resilient over the last several years. Historical cycles haven’t manifested as routinely as they usually do. Some of this is attributable to advances in technology. Some is attributable to changing demographics and safer work environments.

But threats exist. It is reasonable to believe that another insurance cycle will occur, and this will put pressure on the industry’s profitability. Risks of who is an employee and the emergence of the gig economy will create pockets of employees where they weren’t before, and the industry will have to evaluate how it views those pockets in real time. The aging workforce will pressure many industries as they deal with inexperienced replacement workers and more expensive claims from older workers. Economic factors and continued low interest rates will force carriers to focus on traditional underwriting investment, and the question remains as to how long this is sustainable.

However, there are plenty of reasons for optimism, especially following a year as challenging as we could have possibly imagined and the fact that we remain healthy.

For more information on workers’ compensation, please contact Glenn Backus, Chief Business Development Officer of Claims Solutions US at glenn.backus@davies-group.com.