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Spotlight On: Workers’ Compensation



The Topic

Workers’ compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents. The workers’ compensation system is the “exclusive remedy” for on-the-job injuries suffered by employees. As part of the social contract embedded in each state’s law, in all states except Texas, where employers may opt-out of the state’s workers compensation system, the employee gives up the right to sue the employer for injuries caused by the employer’s negligence and in return receives workers compensation benefits regardless of who or what caused the accident, as long as it happened in the workplace as a result of and in the course of workplace activities.

Workers’ compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive, and the strategies used to control costs. According to the U.S. Chamber of Commerce, from 2013 to 2014 maximum income benefits for total disability increased an average of 1.87 percent. The average maximum weekly benefit for 2014 is $867.91, with Iowa heading the list at $1,543.

Workers’ compensation costs are one of the many factors that influence businesses to expand or relocate in a state, generating jobs. When premiums rise sharply, legislators often call for reforms. The last round of widespread reform legislation started in the late 1980s. In general, the reforms enabled employers and insurers to better control medical care costs through coordination and oversight of the treatment plan and return-to-work process and to improve workplace safety. Some states are now approaching a crisis once again as new problems arise.

Among the cost drivers that require attention are the increasing costs of prescription drugs, in particular, the long-term use and abuse of narcotic painkillers, according to industry studies.

Recent Developments

National: According to NCCI’s State of the Line analysis, in 2020 workers’ compensation premiums for private carriers and state funds fell to $42.0 billion, the lowest since 2013, and down 10.8 percent from 2019, when net premiums written were $47.1 billion. Premiums for private carriers alone fell to $38 billion, down 9.5 percent from $42 billion in 2019. The worker’s compensation line of insurance was severely impacted by the pandemic-related recession as businesses closed and unemployment skyrocketed.

Premiums for the residual market (NCCI-serviced workers compensation residual market pools) fell to $800 million in 2020, down 11.1 percent from $900 million in 2019. Its market share fell from 6.7 percent of the total market in 2019 to 6.5 in 2020.

The combined ratio, the percentage of each premium dollar spent on claims and expenses, was 87 for private insurers, compared with 85 in 2019, and marks the fourth consecutive year of results under 90. The combined ratio for the 16 state funds administered by the NCCI was 119 compared with 10 for the previous year. A combined ratio of 100 or higher means that the industry is paying out more in claims than it is collecting in premiums.

Lost-time claim frequency (the number of claims that include loss of income due to time off work as opposed to solely medical care claims) dropped 7 percent in 2020, faster than 4.3 percent in 2019, continuing a trend that has been going on for many years. Claim frequency has been falling 3.9 percent on average every year from 2000 to 2019.

Material excerpted from: Spotlight On: Workers Compensation

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