A couple of weeks ago, we published an analysis on the 83% WC Combined Mystery.  As a refresher, our analysis pointed out that the Workers Compensation industry shows profit (in spite of rate decreases) when unemployment is low and construction payroll growth in particular is high.  Two slides from that blog spoke volumes (Figure 1 – slide 18 of the NCCI state of the line) showed the significant increase in employment and wage rate in construction from 2017 to 2018 alone.


Figure 1: Increases in Payroll Continue to Drive Changes in Premium (NCCI State of the Line, slide 18)

The second display (Figure2) was a mapping of workers’ compensation total premiums against the annual monthly average of new housing starts.

Figure 2:  Average Monthly New Housing Starts vs. WC Premium (NCCI State of the Line, slide 12)

What does this information tell us about Workers’ Compensation Insurance ratemaking and adjustments?  We can possibly infer a couple of issues:  1.  The Construction Industry loss costs may be over-priced, or 2. the non-construction loss costs may be significantly underpriced as a whole.  This may explain why NCCI and the independent bureaus have to drastically increase loss costs and manual rates when construction payrolls decrease to try to keep carrier’s solvent.

These possibilities pushed us to analyze the rate-portions of the experience rating data elements.  Figure 3 is a table that provides a visual for rate data that affects the experience rating.  The table is a creation of rate making data.  Each class code is broken up into its grouping reflective of the industries.  The displayed percentages are the median within the described range of the Expected Loss Rates (ELR) divided by the Base Rate or Loss Cost for each class code in that range.   An example of the calculation for a single code is as follows: MO 9012 has a loss cost of $0.85 and an ELR of $0.62 – so the percentage of expected loss per dollar of loss cost is 0.62/0.85 or 73%.

Figure 3:  Median ELR/Loss Cost – Florida and Missouri

Median per class group
Class Code and Industry Group ELR/Based Rate (FL) ELR/Loss cost (MO)
0000s – Agriculture 42% 74%
1000s – Mining & Raw Materials 38% 70%
2000s – Manufacturing 44% 77%
3000s – Manufacturing 44% 76%
4000s – Manufacturing 44% 76%
5000s – Construction 38% 64%
6000s – Heavy Construction & Utilities 37% 62%
7000s – Transportation 37% 65%
8000s – Retail & Services 43% 74%
9000s – Govt, Hospitality & Non-Profit 44% 77%
All Construction (5000s + 6000s) 38% 62%
All Non-Construction 43% 75%
State as a Whole 42% 74%
Construction Expected Losses 10% lower loss ratio 21% lower loss ratio


What this table indicates is that rate-setting is allowing for non-construction risks to perform at a loss ratio worse than construction and transportation in the mod formulas.  Underwriters understand that construction and transportation have the severity potentials based on the nature of the work performed.  Those two industry groups always lead the nation in workplace fatalities, thus not only are they higher priced through rate-setting to offset catastrophic clams, but carrier underwriters are much more likely to apply consent-to-rate pricing thus increasing even further the premium collected when construction is up.

Workers’ compensation insurance rate swings provide employers with that one thing that employers do not like…uncertainty of costs.  Workers’ compensation is a mandated insurance coverage, yet it depends on NCCI, the independent rating bureaus and the state governments to come up with the basis on pricing of which the largest component is to prevent insurance carriers from going into receivership.  The disparity of expected loss rates (ELR’s) in relation to their loss costs by major industry group further facilitates this uncertainty, specifically, because the current rate setting practices appear to rely on the payrolls of the construction industry to provide financial viability for carriers.  Perhaps an additional practice of leveling of ELR to Loss Costs ratios across all industries will help stabilize the insurance market place to not only reduce rate swing but also ensure carrier viability when construction payrolls are in a slump.