COVID-19 workers' compensation insurance challenges

Workers’ compensation insurers enter 2021 coming off a tumultuous year; the COVID-19 pandemic created new challenges and exacerbated existing ones. With loss costs on a downward trend for years, and expense ratios continuing to rise, the pandemic is accelerating issues that were previously offset by a healthy market and investment returns which are now much lower than pre-COVID levels. Thefederal fund rate, which is closely tied to investment yields for the insurance industry, is currently 0.25 percent (as of February 2021), a 1.75-point decrease from the same time a year ago.

To counter the loss of investment income and to overcome market uncertainties, insurers will need to evolve their risk selection and pricing tactics as well as portfolio management practices. In some cases, it can even become a strong opportunity to gain a competitive edge and claim market share at what may seem like an unlikely time.

Converging Trends Offer a Complicated Outlook

Multiple trends happening within workers’ compensation vividly show insurers being squeezed from both ends of the spectrum: significantly less new business available and potential retroactive premium loss. New business is much harder to find, attract, underwrite, and price now in some industry segments. According to research from our recent “Workers Compensation Industry Trends” report based on insights from the Valen Data Consortium, new business quotes were down 10% overall and up to 23% in some of the more hard-hit industries between April and September 2020, compared to the same time period in 2019 (see chart below). Considering that new business typically accounts for 20-30% of an insurer’s book of business, they must leverage data analytics solutions that help them look beyond their comfort zone and enter new markets.

We also found that policy renewals largely held steady at 97% in September 2020, compared to the same time period in 2019. This can likely be attributed to businesses not being as concerned with shopping for insurance versus other priorities, such as business continuity and workforce needs and safety. While it’s a rare silver lining in a tough year for the industry, the trend may be short-lived. With the decline in new business, it will be extremely important to stay competitive on these accounts for when insurance shopping returns to normal levels.

Perhaps the most important trend we surfaced is that average payrolls in 2020 were consistently flat from pre-COVID-19 levels, which likely suggests disparity between reported and actual numbers. This could lead to a significant return in premium when retrospective audits occur. Considering unemployment rates during the pandemic were highest in April 2020 (14.7%) before declining to a still-elevated level in January 2021 (6.3%), it isn’t hard to imagine payrolls on insurers’ books don’t accurately represent true employee counts for businesses — particularly in the hardest hit industries due to layoffs and furloughs during this time period. This is supported by findings from S&P Global Market Intelligence analysis, which found U.S. workers' compensation premiums fell 8.1% year-over-year to $24.84 billion in the first half of 2020.

Improving Underwriting and Portfolio Management
With insurers in a tough situation to navigate these trends, compounded with lower investment income, they must lean into improved risk selection and pricing tactics to stay competitive in the “next normal” of the market. Leveraging predictive analytics for underwriting to offset low investment income isn’t new. In fact, it was instrumental in helping workers’ comp insurers remain profitable after the 2008 financial crisis. It takes on even more importance in the current marketplace because a decline in new business means the margin for error is significantly less than it was before. Using risk models, particularly loss history, to help insurers write business in new markets at competitive rates can help them mitigate some of these challenges.

To stem rising expense ratios, insurers should consider ways to bring operational costs down while underwriting new and renewal business. It isn’t just about writing the “right” business, but doing so efficiently as well. A large overall expense is time that underwriters spend vetting policies, which can be significantly reduced by aligning risk selection and pricing tactics with straight-through processing (STP). This can be achieved by re-defining or adjusting underwriting rules around a predictive model to ensure certain policies can be priced without human intervention.

Aside from enhanced underwriting, insurers must gain a better contextual view of risk and deeper insights into portfolio performance during the pandemic. Leveraging geospatial analytics platforms capable of layering an insurer’s portfolio with third-party data such as COVID-19 and unemployment data can help identify virus hot spots in real-time—helping insurers proactively manage risk, better serve insureds, and even identify new markets for growth. This can also help insurers visualize their premium at risk by showing their accounts in counties and industries most impacted by the pandemic. Being able to understand premium exposure prior to an audit allows them to avoid being blindsided and improves decision making.

Given the uncertainty of workers’ compensation and the P&C industry, it’s understandable that insurers might want to be conservative in their underwriting and data analytics strategies; however, in doing so, they run the risk of falling behind as competitors use this time in history to reevaluate and reinvent “business as usual” in the next new normal.