Tuesday, October 8, 2013

Jobs, Wages and Premium

I'm confused (but that's nothing shocking).

The Insurance Service Office and the Property Casualty Insurers Association of America say in a report released last week that expanding payrolls contributed new premiums written to the workers' compensation line, helping combined ratios improve to 97.9% for the first half, down from 101.9% a year ago.

But the Wall Street Journal's Ben Casselman says that the improved unemployment figures are masking a troublesome trend - workers' aren't moving up the ladder to better paying jobs but rather are holding on to whatever they have.

In "normal" economic times, employment churn (resignations, firings, replacements) create a much more robust employment condition. In 2007, according to the WSJ article, about 3 million workers churned each month. This past July, that number was just 2.3 million, barely any better than what was occurring during the depths of the last recession.

"Nobody's leaving for a better job," Jason Faberman, an economist at the Federal Reserve Bank of Chicago, is quoted as saying. "These guys aren't moving on to better jobs, which means their positions aren't opening up for the unemployed."

But this news isn't just bad for the unemployed, churn is critical to wage growth.

As explained by Toshihiko Mukoyama, a University of Virginia economist, unemployment for those under age 25 is still elevated at 15.6%, so many of those lucky enough to have jobs are playing it safe by staying put and not risking the move to higher wages.

Robert Hartwig, president of the Insurance Information Institute, noted that the increase in net written premiums, up 4.5% during the period, from a 3.7% gain recorded in the first half of 2012 and a 4.7% increase in the second quarter, was the 13th consecutive quarter of growth.

Hartwig said that, combined with modest increases in the hourly earnings of employees, payrolls expanded at an average annual pace of $216.5 billion during the first half of the year, relative to the first half of 2012.

“Indeed, workers’ compensation, hit hard during the recession by a soft market and a precipitous drop in payrolls, has within the snap of just a few years transformed itself from the fastest contracting major property-casualty line to the fastest growing, with direct premium growth in 2013 up by approximately 10%,” Hartwig said.

How this all plays out in the long run will be interesting. The interrelationship between the economy, jobs and premium health in workers' compensation makes the workers' compensation insurance market a complex study in contrast.

I have heard in several seminars over the past 12 months that while the market is hardening, it is less a reflection of market competition and more about wage recovery.

So premium growth may just be illusional at this juncture. If wages really do stagnate and there are no more jobs available to those who want to improve their employment positions, then we may see premature softening in premiums relative to the overall economy.

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