How Recessions Impact Workers’ Compensation

Many economists believe that a recession is on the horizon, and Bank of America forecasted a greater than 30% chance of a recession starting within the next year.  How will the predicted economic downturn impact Workers’ Compensation claims?

The rate of workplace injury and subsequent Workers’ Compensation claims drops sharply during recessions and rises sharply during recoveries, according to Frank Schmid, director and senior economist, National Council on Compensation Insurance (NCCI).

During a recession, numerous factors indicate a reduction in injuries and Workers’ Compensation claims:

  • Companies reduce employment, which decreases the number of employees that could get injured and file Workers’ Compensation claims.
  • Employment declines more in the hazardous industries (such as construction and manufacturing) than in other sectors, which reduces injury rates accordingly (the reverse happens in boom periods).
  • Companies freeze or reduce hiring. This decreases the number of short-term workers, who have higher frequency of workplace injuries than long-term workers.
  • Inexperienced workers, who tend to have higher injury rates, are typically laid off first during recessions, and there are fewer new hires, so there will be fewer novice (untrained) employees on the job, leading to fewer injuries and claims.
  • Employees who get hurt – especially if their injuries are minor – are less likely to file a Workers’ Compensation claim during the early stages of a recession, when unemployment is rising, because they fear losing their jobs as a result.

Yet other factors indicate a possible increase in injuries and Workers’ Compensation claims:

  • Workplace conditions may deteriorate during a recession (especially in the later stage of a recession), with employers using older, less-safe equipment to meet projections, which could lead to a surge in injuries.
  • Employers are likely to require employees to work longer shifts and reduce training opportunities, etc. during a recession. Tired, overworked, undertrained employees lead to more injuries – and more Workers’ Compensation claims.
  • Safety often becomes a lower priority during recessions, which (understandably) increases injuries and claims.
  • Workers facing layoffs due to a recession may have increased incentives to file Workers’ Compensation claims, since these benefits are often more generous and longer lasting than unemployment insurance benefits.
  • Frequency and duration of Workers’ Compensation claims tend to increase as the recession deepens. It can be challenging to find re-employment opportunities (including part-time and limited duty options) for people ready to resume working.

In the predicted upcoming recession, experts believe the impacts are likely to be milder than they were in the Great Recession.  One key reason: since high-risk industries (such as construction and manufacturing) have lower employment shares today than they did during the Great Recession, employment losses in these sectors will have a lower impact on overall injury frequencies during the next economic downturn.

Jencap specializes in monoline Workers’ Compensation. We work with industry-leading carriers that have unique claims handling expertise for Workers’ Compensation; specifically, the expertise needed to manage the types of claims that come from a recession.  Policyholders reap the benefits from these specialized carriers because their loss ratios and experience modification calculations aren’t as adversely affected.

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