A surge in unemployment rates due to the COVID-19 lockdown is set to weigh heavily on the profitability of workers’ compensation insurers in the US, according to analysts at Moody’s.
The rating agency noted that the workers’ compensation sector is structurally tied to the economy and labour markets.
Employers in the US are also required to cover medical care and lost income for workers from occupational injury or illness as well as provide death benefits.
Given the shutdowns, payrolls have sharply declined, which in turn will drive premiums lower for workers’ compensation insurers, Moody’s warned.
During the last recession, worker’s compensation insurers’ direct premiums written fell 2.4% in 2008 and 3.4% in 2009 following job losses of 3.6 million in 2008 and 5.1 million in 2009.
In April 2020, US employers scrapped almost 21 million jobs, although some job recovery has occurred in May.
“The small business sector broadly and certain industries such as hospitality and leisure have been particularly hard hit,” said Siddhartha Ghosh, a Moody’s vice president.
“Workers’ compensation insurers will see a sharp drop in premiums written in the coming quarters as payrolls decline, causing them to return some premiums to policyholders.”
Low interest rates will add further pressure to the profitability of workers’ compensation insurers, which is heavily dependent on investment income given the long claim payout period.
However, with much of the US workforce still relying on remote working, claims frequency will likely be kept down, which means insurers may be able to keep loss costs in check despite a rise in claims from healthcare workers and first responders.
That said, multiple states have recently amended regulations or passed new ones to shift the burden of proof for claims to certain employers, changing current law, which requires claimants to prove their cases.
Moody’s cautioned that these changes could lead to more coverage disputes, increased litigation, and rising costs for workers’ compensation insurers.