Pricing the Pandemic Risk in Workers Compensation Insurance
The National Council on Compensation Insurance (NCCI) is the main rating bureau for workers compensation insurance. NCCI develops recommended loss costs (that part of an insurance rate associated with claims) for 38 jurisdictions. Most other U.S. jurisdictions use independent bureaus which are significantly influenced by NCCI’s rating framework.
Each year NCCI revises its jurisdiction-specific loss cost filings by incorporating claims data from the last experience period. In plain-speak, NCCI updates the amount of expected claim payouts for the next year based on updated claims loss data from prior years. Workers compensation insurers use those updated “loss cost” forecasts to set the rates they will charge policyholders.
What do we know about COVID-19 workers compensation claims?
In April 2020, NCCI introduced a special code for COVID-19 related workers compensation claims.[1] In the 38 jurisdictions served by NCCI, insurance companies use this code to designate COVID-19 related claims and report loss data back to NCCI. Last month NCCI shared its analysis of 2020’s COVID-19 claims:[2]
- 45,000 COVID-19 workers compensation claims had been made;
- Resulting in $260 million in workers compensation losses;
- With an average loss per claim of $6000.
75% of those claims involved workers at nursing homes, hospitals, and other healthcare settings as well as first responders.
Will COVID-19 claims be included in the calculation of loss costs?
At a high level, NCCI uses past claims experience (actual losses) to predict future claims experience (loss costs). In developing loss costs, NCCI excludes claims data relating to catastrophes under the theory that past catastrophe losses are not predictive of future losses over a short-term rate-making horizon (e.g., one year). For example, the fact that we experienced a pandemic in 2020 does not suggest we are likely to experience a new pandemic in 2022 or 2023.
NCCI recently announced that it will exclude COVID-19 losses in its upcoming loss cost filings with state departments of insurance. NCCI foreshadowed this decision a year ago when it announced COVID-19 claims would be excluded from an individual employer’s experience modifier.[3]
NCCI’s decision means there is no mechanism in the current workers compensation rate-making architecture for insurers to recover their COVID-19 claim payments. Pandemic was not in the loss costs before COVID-19 and the actual losses from COVID-19 will not feed into the calculation of future loss costs. As a practical matter, COVID-19 claims costs are financed out of workers compensation insurers’ capital accounts.[4]
Is NCCI’s decision to exclude COVID-19 claims from loss costs “fair”?
Insurance companies issue policies covering an employer’s obligations to pay claims under a state’s workers compensation scheme whatever those obligations may be. Workers compensation insurers must pay the resulting claims even though the rates they charge may not contemplate a particular risk of loss.
So it is for COVID-19. Workers compensation insurers promised to cover workers compensation claims payable under the respective state workers compensations schemes. When they sold those insurance policies, workers compensation insurers recognized there was a risk that the cost of a catastrophe event, such as a pandemic, had not been included in the rates they charged and would not be contemplated in loss costs going forward.
It is against that sort of risk — an existing but unpriced risk of loss — insurers hold capital. Looking through that lens, NCCI’s decision to exclude COVID-19 claims from loss cost calculations does seem fair.
Are state-based presumptions of compensability for COVID-19 “fair”?
In general, a workers compensation claimant has the burden to prove his or her injury or illness is work-related.
In many cases, the connection between the workplace and an injury or illness is obvious. For a disease that is spreading throughout the broader population, such as COVID-19, it may be difficult for an employee to prove the disease had been contracted in the workplace as opposed to home or some other setting.
During the pandemic, eight states temporarily changed workers compensation benefit eligibility rules for certain kinds of workers. Under these new rules, covered workers are eligible for workers compensation benefits unless the employer or insurer could prove COVID-19 had been contracted outside of the workplace.
Such “presumptions” effectively shift the cost of COVID-19 medical treatment, sick leave, and disability from health insurance and other benefit programs into the workers compensation system. That does not seem fair.
Will workers compensation rates contemplate the risk of future pandemics?
Workers compensation rating methodologies traditionally have not contemplated the risk of catastrophe events.
Following September 11, NCCI developed a separate rating factor to reflect the risk of terrorism losses within the scope of the Terrorism Risk Insurance Act (TRIA). Several years later NCCI introduced a similar “Catastrophe” rating factor contemplating the risks of terrorism events outside of the scope of TRIA as well as of earthquakes and industrial accidents resulting in more than $50 million of loss. This Catastrophe rating factor typically equates to a loss cost of 1¢ per $100 of payroll (which is as small as a loss cost can get).
NCCI recently announced plans to expand the scope of the Catastrophe rating factor to “any event which exceeds $50 million in losses” — which would include pandemics. Presumably, this expanded scope will cause the Catastrophe rating factor to nudge up somewhere above 1¢ per $100 of payroll.
Importantly, NCCI can only estimate the cost of future pandemics based on each state’s workers compensation laws as they currently exist. NCCI cannot factor in the possibility that one or more states may change the rules for eligibility to receive workers compensation benefits during a pandemic or any other catastrophe.
NCCI’s proposed expansion of the Catastrophe rating factor does nothing to address what is probably the most significant pandemic risk facing workers compensation insurers: A temporary change in the benefit eligibility rules during the pandemic.
Should workers compensation be included in a federal pandemic insurance program?
While several pandemic insurance programs have been proposed over the last year, each has focused only on business interruption and event cancellation coverages. There appears little, if any, interest in thinking through the role workers compensation could or should play to support workers and their families during a future pandemic.
In a recent report on terrorism insurance, U.S. Treasury highlighted the structural challenges facing workers compensation insurance market in financing losses from large-scale terrorism events, such as that:
- “[L]osses under a workers’ compensation policy are potentially unlimited”;[5]
- State pricing controls over workers compensation insurance “will limit what insurers can charge (generally as well as specifically for [catastrophe] risk) and potentially affect whether the purchase of reinsurance is economically viable”;[6] and
- Workers compensation “insurers are required by state law to cover [catastrophe] risk (including [nuclear, biological, chemical and radiological-related catastrophe] risk)”.[7]
These same structural challenges exist if workers compensation insurance is expected to cover the pandemic risk. An extra penny or two in loss costs will do nothing to fix them.
If workers compensation is to play a prominent role in responding to future pandemics, policymakers must start that discussion now including transparent and stable criteria for benefit eligibility and an adequate and sustainable means of financing those benefits.
[1] CIF-2020–21 — Announcement of Item U-1401 assigning Extraordinary Loss Event code number 12 (April 21, 2020).
[2] Workers Compensation: Lessons Learned from the Pandemic, NCCI (June 29, 2021).
[3] Announcement of Item E-1407 (May 18, 2020).
[4] An insurer’s capital is known as “policyholder surplus”.
[5] Report at page 46.
[6] Report at pages 46–47.
[7] Report at page 47.
