Are we in or headed to a recession? Each of us might have our own opinions based on the industry we work in, the number of times we have to fill our gas tank during the week, and the area of the country where we live. According to the economic cognoscenti, the jury is still out – some industry insiders say yes while others disagree. At least some industries say they are in a recession and in a recent survey, nearly 80% of affluent Americans believe a recession has already hit the U.S.
What would a recession mean for workers compensation? A few weeks ago, Insurance Journal looked at the issue of recession and its impact on insurance as viewed by independent agents in various sections of the country, who offer commentary on both actual and anticipated effects. Some note that it is somewhat unusual to have a recession occurring in conjunction with a soft market. There isn’t much mention in the way of workers comp, except in terms of noting that declining payrolls lead to lower workers comp premiums. Some agents note that significant business curtailment has been in evidence in the housing and construction industry.
The past may be the best predictor of the the future. The Minnesota Department of Labor & Industry compiled a 2002 report on the effects of recession on workers comp as evidenced by various state studies.
Conventional wisdom points to a preliminary spike in claim frequency as employers reduce ranks – there is some anecdotal discussion about an increase in fraud, although most data doesn’t support that. Overall, during a recession the number of claims tends to decline – there are fewer workers, and those workers may be more timorous about filing claims, fearing job loss.
While frequency drops, severity tends to increase. Researchers in MA suggested this might be because businesses find it more difficult to provide light-duty work; also, due to the fact that because more experienced workers are retained, the average injury will be more severe. A California study also noted that recessions may add to claim severity by increasing the time it takes for a worker to find a job.
In a six-state study, researchers noted that “…recessions increase back-end cost drivers (i.e., increase the cost per claim) to a greater extent than they increase front-end cost drivers (i.e., increase the number of claims). They state that recessions are ‘characterized by increased use of the system, longer duration claims, and more frequent and larger lump-sum settlements.'”
Minnesota also reported in some detail on their own state’s experience with a workers comp during a recession, a report which our colleague Joe Paduda discussed at some length.
During a recession, employers should be doing what they should always be doing: preventing injuries from occurring, tightly managing any injuries that do occur, and helping injured workers to recover and return to work as expeditiously as possible. While there is always cause to keep an eye on things during any sudden shift in employment, the stories about an increase in fraud may be overblown. As the researchers in the Minnesota report note, boom times pose a greater risk for a rise in frequency as organizations experience a sudden influx of inexperienced workers.
Tags: economy, recession, workers comp
