The Impact of Economic Downturns on Workers’ Compensation Claims Frequency

As our economy becomes front-page news, the familiar refrain will soon be published in industry blogs, newsletters, and magazines that if there is a recession there will also be an increase in workers’ compensation claims frequency

The relationship between economic downturns and workers’ compensation claims frequency has long been debated. Conventional wisdom suggests that claims frequency increases during economic slowdowns as workers file claims to avoid layoffs or maintain medical coverage. 

However, I have noticed that workers may be less likely to file claims during downturns, fearing job loss.   Additionally, employers often retain their most valuable, experienced, and productive employees during these times. The more experienced the workforce the lower the claims frequency.  Recent studies have found that new employees—those within their first year of employment—account for a disproportionately high percentage of claims. If there is a downturn in the economy, then there is a downturn in new hires, which should result in reduced claims frequency.

During the COVID-19 pandemic, there was an unusual claims frequency pattern because most of the workforce was not working. I am not including that unusual pattern in this analysis.  The California Rating Bureau also noted in its report on the impact of the 2008 economic downturn on claims frequency that there was a noticeable increase in Cumulative Injury Claims rates. However, the overall claims frequency still went down.

Trends in Work-Related Injury Frequency

Despite these competing factors, data over the past 20 years suggests that work-related injury frequency has steadily declined, irrespective of the broader economic conditions.

Reasons for the Decline

I believe that the consistent downward trend in work-related injury frequency over the past few decades can be attributed to several factors:

• Improved Workplace Safety Measures: Advances in safety protocols, equipment, and training have likely contributed to fewer workplace injuries.
• PPE equipment: Advances in the design and use of PPE equipment.
• Increased Focus on Prevention and Risk Management: Employers have increasingly emphasized injury prevention and risk management strategies to reduce costs and improve employee well-being.
• Changes in Industry Mix and Employment Patterns: The decline could also be explained by shifts in the economy towards less physically demanding jobs and changes in the composition of the workforce.
• Regulatory Efforts and Enforcement: Stronger regulatory frameworks and more rigorous enforcement of safety standards have improved workplace safety.

A safe future

No matter the economy, I expect the trend in claims frequency to continue to decline as AI and other tools are used to identify safety opportunities, and as the financial incentives drive employers to focus on reducing their overhead costs.

Claims frequency is typically expressed as:

Claims Frequency = (Number of Claims / Number of Full-Time Equivalent Employees) x 100

Or, alternatively:

Claims Frequency = (Number of Claims / Total Hours Worked) x 200,000

Most insurance companies measure claims frequency as the number of claims per $1,000,000 of earned premium. This number is less consistent and less accurate than the BLS or self-insured method of measuring claims frequency.

The numerator represents the number of claims, while the denominator represents the exposure base, such as the number of full-time equivalent employees or total hours worked.

An increase in the economy can lead to:

• An increase in the number of claims (numerator), but
• A decrease in claims frequency (due to the rise in the denominator, i.e., more employees or hours worked)

Claims frequency is a rate considering the workforce size or hours worked. By adjusting for the exposure base, claims frequency provides a more accurate picture of an organization’s or industry’s safety performance.