The Wild, Wild West of COVID-19: CA Ex-Mods and Workers' Comp Premiums

This blog post can also be found on our Coronavirus Resource Center.

The pandemic created a Wild West scenario of business interruption, disorder, fear, and uncertainty. Last year, some employers had to make tough decisions to reduce their workforce or reduce salaries just to stay in business.

In addition, workers’ comp (WC) claim costs, experience modifications (Ex-Mods), and premiums have all been affected by the pandemic. For example, employees with existing WC claims unrelated to COVID-19 have experienced delays in their medical treatment as many health facilities shut their doors or scrambled to treat injured workers through telemedicine. When treatment is delayed and an injured worker remains off work, overall claim costs increase, which in turn can result in higher Ex-Mods and premiums.

As we look with hope toward the end of the pandemic, this chaotic insurance situation continues to evolve. We have previously discussed the surge of COVID-19 workers' comp claims and cost data. In this article, we offer an in-depth summary based on information presented by the Workers' Compensation Insurance Rating Bureau (WCIRB) at the Division of Workers' Compensation (DWC) annual conference in late March.

The COVID-19 Economic Recession

WCIRB studies on California payroll data show the impact of COVID-19 on employers to be largely industry-specific. The industries impacted most by the pandemic include leisure and hospitality, food service, arts and entertainment, retail, agriculture, and — to a lesser extent — construction. Professional services, including financial and insurance services, have remained relatively stable.

Not surprisingly, those sectors of the economy that were hardest hit by the pandemic in terms of payroll reductions had fewer and less costly claims, according to WCIRB loss data. From a breakdown of claims by industry, healthcare suffered the most, with 36% of all WC claims being COVID-19 cases. Government and public service, including firefighters and police officers, was a close second.

Overall, professional services sustained the least amount of loss in payroll as well as the lowest percentage of COVID-19 claims (under 6%). This percentage is likely due to the ability of workers to work from home with less COVID exposure and less risk of injury overall based on job duties. Though working from home does carry some risk, including repetitive strain injuries caused by poor ergonomics, injuries might be lower due to less exposure to various injury factors or longer intermittent work, including frequent breaks and interspersed activities.

COVID-19 Workers' Comp Claims

The pandemic affected both COVID-19 and non-COVID-19 WC claims. Although new data is still emerging, DWC research shows approximately 130,000 reported COVID-19 cases through the end of February 2021. Costs for 2020 are currently estimated to be around $1.2 billion for the California insured market.

While both medical and indemnity portions of COVID claims have been lower than the overall average of non-COVID claims, the total average COVID claim cost, after taking into account rare hospitalizations and even rarer deaths among working-age individuals, is currently around $30,000. One in five lost-time claims in 2020 was due to a COVID-19 infection.

A WCIRB breakdown of the specific claim costs showed that 20% of indemnity costs paid in 2020 were due to COVID-19 cases. Claim filings after statewide shelter-in-place (SIP) and compensability presumption orders increased dramatically. However, the initial denial rate of 28% for COVID claims compared to the 9%-10% rate for non-COVID claims suggests that many COVID exposures were due to non-work causes despite the rebuttable presumption adopted under SB 1159.

Non-COVID-19 Workers' Comp Claims

With respect to non-COVID-19 claims, the number of reported claims dropped considerably. The WCIRB reports a 30% decrease in non-COVID claims in the third quarter of 2020 compared with the same period in 2019, and 40% fewer claims in the second quarter of 2020 than in the second quarter of 2019. Of course, this decrease is due in part to the unemployment situation since fewer workers mean fewer injuries and claims.

Another theory is that employees may have been less likely to file claims for injuries due to job uncertainty and fear of layoffs. Additionally, some workers may have put off going to the doctor in fear of contracting COVID-19 during the visit.

However, claim costs went up for reported non-COVID-19 claims and existing pre-COVID-19 claims as a result of the SIP orders and COVID fears. Although early studies from 2020 claims show a decrease in medical costs — especially for smaller medical-only claims — overall costs in other benefit categories increased. The wider availability of telemedicine may have offset some of the costs. However, delays in medical care due to treatment not viewed as essential, medical offices not participating in telehealth, or the inability of the treatment to be performed via telehealth, also delayed return to work and caused longer periods of temporary disability.

Another factor leading to longer disability duration was the challenge of getting medical-legal evaluations and hearing dates. Once medical offices re-opened, appointments were backlogged, and treatments lasted longer. Permanent disability values also increased. The WCIRB reported a 12% drop in the rate of closing claims in 2020 compared with 2019.

WCIRB Cost Projection Challenges

The WCIRB has attempted to predict the costs of 2021 COVID-19 claims based on 2020 data. This task is challenging due to ongoing economic uncertainty, the progression of the vaccine rollout, and long-term unknowns about the health consequences of COVID-19 and its variants. The DWC reported 11,000 COVID-19 WC claims for the first two months of 2021. Those numbers are likely to decline with the vaccination rollout and the implementation and enforcement of protective measures (AB685/OSHA and SB 1159).

At the same time, there is the possibility for increased claim costs from post-termination and cumulative trauma late claim filings depending on continued economic changes and future job layoffs. Additionally, there may be a long tail and added costs associated with COVID-19 claims for individuals who suffer long-term health consequences from their infections.

COVID-19 Impact on Ex-Mods

Payroll and claims are the primary components affecting Ex-Mods. Any changes to Ex-Mods directly related to COVID-19 will likely be industry-specific, with frontline workers hit the hardest. Businesses in hospitality and food service (and others that had massive reductions in workforce and payroll) are likely to see a decrease in claim frequency. However, this change may or may not trigger a reduction in an employer’s Ex-Mod rating.

Typically, when payroll decreases, the expected losses also decrease, causing the Ex-Mod rating to increase. Since the Ex-Mod compares an employer’s actual losses to their expected losses, if there is a decrease in payroll and the claim values remain unchanged or increase, the Ex-Mod rating will increase. For example, an employer with three losses totaling $50,000 will likely see a greater increase to their ex-mod if their expected losses are only $25,000 compared with $75,000. Employers who had both payroll reductions and an increase in non-COVID-19 claims (or their claim values remained unchanged from the previous year) will likely be most impacted. Businesses least affected will be those with stable or increased payrolls.

Increases in claim severity (higher reserve values) might be offset to some degree by decreases in claim frequency since the Ex-Mod formula is weighted more heavily toward frequency and applies a discount to reduce the shock value of larger claims. This weighting is to account for the less predictive outcomes of larger claims that are also beyond the control of employers.

Fortunately, the WCIRB is excluding all COVID-19 WC claims after Dec. 31, 2019 through 2020 from the Ex-Mod calculation. This decision could affect Ex-Mods with 2021 effective dates and potentially into 2022 and 2023.

COVID-19 and Workers' Comp Premium Changes

It is difficult to isolate the direct impact of COVID-19 on premiums and predict whether premiums will go up or down in 2021. In addition to the unprecedented direct and indirect costs associated with COVID-19, premium is based on several variables, including the nature, size, and location of a business. The pandemic placed a spotlight on healthcare workers and the inherent risks of contracting infectious diseases, as well as higher rates of stress and burn-out for these workers. Premiums could go up in the healthcare sector.

A new and as yet undetermined factor in premium is the new work-from-home (WFH) trend. As some businesses transition their workforce to permanent or part-time telecommuting, there is sure to be new data on WFH injuries compared to at-office injuries for the same occupations.

But aside from COVID-19, there are other new or changing variables that could play into premium as well, such as the increase in mass shootings and natural disasters. Businesses in locations considered at high risk may face higher premiums regardless of the type of industry. Also, though lower claim frequency and severity in 2020 may offset some of the cost, medical inflation has increased.

The WCIRB’s governing committee met on April 21, 2021 to discuss regulatory and pure premium rate filings, and the WCIRB is recommending the commissioner increase the advisory pure premium rate to $1.50 per $100 of payroll for policies incepting on or after Sept.1, 2021. This rate increase constitutes a 3.4% increase over the current rate of $1.45 for policies incepting on or after January 1, 2021. The WCIRB said they essentially excluded accident-year 2020 experience from the latest projections because the COVID-19 pandemic heavily impacted wages, premium and loss experience last year, and that data generally will not be used for the September 1, 2021 filing.

Previously, the WCIRB recommended a small COVID cost adjustment. However, the insurance commissioner did not accept this recommendation, noting that any additional adjustment specifically related to COVID-19 will be dependent on further data by the WCIRB and DOI. The data will also need to be analyzed in the context of the effect of the vaccine rollout and other COVID-19 control measures. Due to the inherent lag in reporting, this rate reduction does not reflect pandemic-related costs as it is current for insurance carrier data only through March 31, 2020. As more data rolls in, we might see later surcharges.

The National Council on Compensation Insurance (NCCI), which includes data on most other states, estimates an 8% decline in premium for 2020 and a 7% decline in claim frequency. Likewise, many states have announced there will not be premium increases in 2021. Oregon, Ohio, and Washington are among the states indicating rate cuts. This data does not include self-insured employers.

It is important to note that advisory rates are not required to be followed by insurance carriers, and individual employers will see rates increase or decrease depending on their own claim history, payroll, and industry classification. Uncertainty is likely to cause some underwriters to be more cautious and increase premium. In general, premiums will likely follow an insured’s Ex-Mod.

In other words, if the Ex-Mod goes down, the premium will too and vice versa. Premiums for employers who are self-insured and purchase an excess WC policy may receive rate increases of 5%-10% in 2021 due to the results of expensive COVID-19 claims and high claim payouts associated with mass shootings, which typically involve multiple WC claims. Please keep in mind that this information is evolving rapidly.

How to Pivot and Mitigate Exposure in the New World

Whether or not COVID-19 has directly impacted your business, we recommend that you concentrate on what you can control in this changing business environment. Here are some suggestions:

• Revisit and improve your safety program and make COVID-19 prevention a part of it.
• Make sure you are following legislative mandates and enforcing COVID-19 related provisions, including the latest state and national regulations.
• Provide WFH employees with ergonomic education and tips to reduce repetitive strain injuries.
• Adopt a drug-free workplace policy.

In addition to reducing the frequency of injuries and positively influencing your Ex-Mod, many insurance carriers apply discounts to your premium based on such measures.

You can also use strategies to decrease the severity of claims by developing a return-to-work program to bring injured workers back to work sooner after an injury. Programs like re-employability can help with return-to-work initiatives. Keep the lines of communication open with your employees by checking in when they are disabled and advocating for benefits on their behalf. The way you handle your injured employees and help them manage their WC claim process can reduce litigation and facilitate claim closures. Work with your carrier and insurance broker to request regular claim reviews to ensure claim strategy and reserves are appropriate.

Finally, take steps to improve the health and wellness of your workplace. Employees who are in a better state of general health mentally and physically are less likely to suffer serious injuries and are more likely to rebound more quickly from injuries.

Learn about workers' comp for remote employees as part of your property & casualty insurance program.