California has experienced dramatic drops in employment as the COVID-19 pandemic continues to unfold. About 4.3 million first-time Unemployment Insurance claims were processed in the first ten weeks since the start of the pandemic. This comprises more than 20% of California’s total labor force prior to the pandemic.
The impact of this COVID-19 induced economic downturn on the workers’ compensation system is unclear given the magnitude and suddenness of the employment drop, uncertainty surrounding the economy reopening, trends in post-termination claims and potential future waves of COVID-19 infections.
Patterns of historical impacts of prior economic downturns on the workers’ compensation system may shed light on what we could anticipate in the California workers’ compensation system.
In this study, the WCIRB analyzed historical impacts of economic cycles between 1961 and 2017 on workers’ compensation claim frequency, provided forecasts of claim frequency changes in light of the current economic situation and summarized the potential impact of post-termination and COVID-19 claims on claim frequency. The WCIRB’s findings include:
— While many factors influence claim frequency, between 1961 and 2017, overall claim frequency decreased modestly more during years of economic recession than during years of expansion. The modest decline during economic downturns was partly due to cumulative trauma (CT) claims, which, unlike other claims, often increased during downturns.
— For industry sectors that were hit the hardest during the 2001 recession and the Great Recession, claim frequency tended to fall along with job losses or fall faster during economic downturns compared to economic expansions.
— Based on the post-COVID-19 national unemployment rate for April 2020 of 14.7%,3 the WCIRB’s econometric model projects indemnity claim frequency to decline by 14% in 2020. This estimate accounts for several economic and claims related factors but does not fully reflect recent trends in post-termination claims or the impact of COVID-19 claims.
— Since 2012, about 25 post-termination claims (most are CT claims) have been filed for every 1,000 jobs lost. If only 50% of the rate of post-termination claims is applied to the 4.3 million Californians who have lost jobs, about 54,000 post-termination claims could be filed over the next year, increasing statewide indemnity claim frequency by approximately 25%.
— Many claims with a COVID-19 diagnosis are emerging in the workers’ compensation system. Based on two cost estimates of presumptions of compensability that the WCIRB recently published, the estimated frequency increase from COVID-19 claims ranges from 14% over a four-month period of a rebuttable presumption applied to all workers directed to work outside of home to 42% over an annual period of a conclusive presumption to all essential workers.
Historically in the California workers’ compensation system, indemnity claim frequency often declined during economic downturns at modestly greater rates than in periods of economic expansion. The rate of CT claims, on the other hand, often increased significantly during economic recessions. Non-economic factors also impact claim frequency.
The WCIRB’s econometric frequency model that accounts for both economic and non-economic factors suggests that with the dramatic post-COVID-19 economic slowdown and unprecedented job losses, indemnity claim frequency will drop significantly.
However, the model does not reflect any claims arising from COVID-19 diagnosis nor does it fully reflect recent trends in post-termination CT claims. It is possible and perhaps likely that growth in these types of claims will more than offset the impact of the economic slowdown on claim frequency.