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Workers Compensation Rates: Is The Soft Work Comp Insurance Market An Illusion?

Updated: Jul 3


The "Soft Market"

For employers a soft market should be welcome as the term is used interchangeably with "buyer's market" and would be characterized by lower workers compensation rates and increased competition for new business. And, for some time now I've heard numerous people in the industry refer to the current soft market we are experiencing for workers' compensation insurance.

The business press has routinely reported the announcements from state Departments of Insurance regarding the "rate" reductions they've experienced. This is occurring across the country. For example, Insurance Journal reported Missouri Employers Will See Reduced Workers’ Compensation Rates in 2024.

This article says "...employers should see a reduction in workers’ compensation rates in 2024, the third straight year of declining rates. The [Rating Bureau] recently proposed an overall decrease of 7.5 percent for 2024 workers’ compensation loss costs."

See how the terms workers compensation rates and loss costs are used interchangeably? They are not the same thing.

And, simply because loss costs decrease 7.5 percent doesn't mean that employers can expect to pay 7.5% less and not even less at all. In fact, there is data suggesting the opposite; that employers are paying more while loss costs decrease (we'll get to that below).

What Are Loss Costs? (If you understand Loss Costs, skip to the next section "So, What Is The Illusion?")

A Loss Cost is calculated by the rating bureau (NCCI in most states) for all NCCI work comp class codes in each state. It is an actuarially determined dollar amount of workers' compensation insurance claims the insurer can expect to pay for every $100 of payroll.

Loss costs are the average costs associated with workers' compensation claims, including medical payments and compensation for lost wages due to work-related injuries or illnesses. These do not include insurer expenses like overhead and profit margins.

Loss Cost Multipliers are amounts that your Work Comp Insurance Company charges in addition to the Loss Cost to account for items like

  • Marketing Costs (Commissions)

  • Taxes

  • General Business Expenses

  • Underwriting Profit

  • Etc.

The Loss Cost Multiplier is expressed as a factor or multiplier to be multiplied by the Loss Cost to arrive at the Rate.

The Workers Compensation Rate is what you pay for every $100 of payroll.

Here is current data (2024) from a Missouri filing for the Travelers Indemnity Company.

NCCI Code 3632 Machine Shop NOC:

Loss Cost $2.31

X Loss Cost Multiplier 1.668

= Rate $3.85

Last year, in 2023, The Travelers Indemnity Company filed a rate of $3.95 in Missouri for NCCI Code 3632 Machine Shop NOC. So, this rate did fall 2.6% but not the anticipated 7.5%.

You can see that workers compensation rates are not only dependent on Loss Costs, but also additional business expenses and the desired underwriting profit the work comp insurance company will build into it's LCM (Loss Cost Multiplier). If insurance companies increase their multipliers faster than actual loss costs fall, you could have higher workers compensation rates despite falling workers' comp claim costs. That, though, is not what is going on here.

So, What Is The Illusion?

There are actually 2 illusions in one.

  • You could easily (likely?) end up paying more for your workers' compensation insurance even though loss costs and rates are declining.

  • Second, loss costs and workers compensation rates are falling while claim costs may in fact be rising.

Why? Well, there is another factor that, although subtle, effects Loss Costs (and work comp insurance premium) in an outsized way. And, that factor is wages.

I've always felt that the wage inflation the country is experiencing has contributed to the recent decline in NCCI work comp class codes loss costs, but now there is some data to support this.

BUSINESS INSURANCE published last week (April 30) Workers comp loss costs decreasing due to payroll changes: NCCI. This piece is based on a report and a corresponding post NCCI published in April; both titled "Understand Loss Cost Actions."

The linked NCCI post states as one of it's highlights that:

"In recent history, costs have been increasing at a slower pace than wages, resulting in decreases in loss costs."

According to NCCI, costs haven't necessarily been falling at all, but, rather, increasing slowly.

Wages and claim costs have opposing effects on loss costs. If claims costs increase, there is upward pressure on Loss Costs. If wages increase, on the other hand, there is downward pressure on loss costs due to the fact that Loss Costs are a measure of claims cost per $100 of payroll. To demonstrate take the example of steady work comp claims costs and rising wages:

Wages impact on a classification's loss cost.
Wages' impact on a classification's loss cost.

Increasing wages/payroll decreases loss costs and, normally, workers compensation rates. And, the country has been experiencing significant wage inflation.

Rising wages makes sense as the culprit behind decreasing loss costs (as NCCI determines) since the claim costs couldn't explain the decrease due to the simple fact that they haven't decreased.

In fact, there has been plenty of press that points toward increasing workers compensation insurance costs; which would characterize neither declining loss costs nor a soft market. For example:

⚫️ BUSINESS INSURANCE published on June 26, 2024 Comp medical inflation outpaced economy over two years: report which examines recent medical inflation. Enlyte LLC, the author of the report, states among several conclusions related to medical charges and trends "Physician charges per procedure performed increased by 11% in workers compensation claims from 2020 through 2022."

⚫️ BUSINESS INSURANCE published on March 6, 2024 Workers comp costs up despite general inflation decline which noted:

  • Persistently high workers' compensation payment growth since 2020

  • Increased Health Care labor costs & shortages, especially nursing

  • Medical inflation within hospital inpatient, outpatient and ambulatory surgery center services

⚫️ BUSINESS INSURANCE published on May 1, 2024 Rapid comp indemnity growth post-pandemic trend to ‘watch’ whose title is self explanatory.

⚫️ Plus more articles too numerous to mention about general Medical Inflation.

What Does This Mean For You?

As stated in the beginning of this post, there is data to suggest that your workers compensation insurance premium could be going up! Or, you could easily end up paying more for your workers' compensation insurance even though, on paper, your rates may be lower than in previous years.

This will likely be the case! In NCCI's report on page 3 they state:

"Before delving more into the reasoning for these decreases, it’s worth noting that although bureau loss cost/rate level have been workers compensation premium continues to mostly increase."

If your company's wages are rising faster than your workers compensation rates are falling, you'll end up paying more standard work comp insurance premium. And, on average, this seems to be the case nationally. Why? Because the basis of exposure for workers' compensation insurance is payroll. For those unfamiliar with work comp and wondering "how is work comp calculated" see below. You can see how wage inflation increases payroll; the starting point for workers compensation insurance premium determination.

Payroll Growth Vs. Wage Inflation

When payroll increases due to improved business activity (e.g. your hiring, expanding, and making more money) increased work comp insurance premium is neither worrisome nor unexpected. It's wage inflation that increases the cost of your workers' compensation insurance and harms your bottom line since it doesn't necessarily correspond to increased revenue.

And, there's your illusion. Loss costs down and prices up for all NCCI work comp class codes. Wage inflation, rather than meaningful improvements in claims performance, has been the primary driver of falling loss costs. But, the higher payroll is multiplied by those lower rates and offsetting any perceived decrease in costs.

Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.

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