An Actuarial Response to COVID-19

May 13, 2020

What Happens When Exposures Are Way Down?

Actuarial Methodology and Assumptions

A fundamental tenet of actuarial work is that past experience is predictive of future outcomes. Standard actuarial methods rely on historical loss data to tell us information on how we expect claims to develop; we rely on historical exposures to inform us about yearly volume of operations. When there is a shift in claims handling, exposures, or business operations, actuaries need to know how to respond.


  • New business in California: Split California vs Non-California
  • Business Closure: Split data between continuing and discontinuing ops

The Basic Actuarial (Renewal) Projection is Simple: [Loss Rate] * [Exposure]

For example, workers’ compensation (WC) actuaries will determine, typically based on client data, the prospective loss rate per $100 payroll. This loss rate will then be multiplied by the prospective year’s payroll as provided by the client.


Best Practice for Change: Segmentation – Identify, Isolate, Assess, and Adjust!

When business composition changes, actuaries need to adjust data to maintain core (historical) homogeneity and then make adjustments related to the change.


The COVID-19 Environment Impact on Actuarial Assumptions

With the presence of COVID-19, we are dealing with an unparalleled situation that has disrupted and changed nearly every aspect of business. The credibility of past experience being predictive of future outcomes is called into question on many fronts.


Exposure Impacts
Except for essential services, all business is nearly completely halted, occupancy is dramatically reduced, and corporate employees are at home. It is still unclear when stay-at-home restrictions will be lifted or how and when social distancing measures will be relaxed. Without a vaccine available, seasonal reinfection is also a distinct possibility, creating seasonality concerns.

For some industries, like hospitality, there are new exposures – defined as “Alternative Use” (e.g., housing essential service personnel, patients, or the homeless). Furthermore, other services are modified or stopped (e.g., gyms, pools, or restaurants). These new and adjusted exposures will need to be identified and isolated so that they can be assessed and adjusted.


Loss Development Impacts
COVID-19 has also put a damper and delay on the servicing of workers’ compensation claims. Elective surgeries are not being performed, physical therapies are not taking place, and court appointments and mediations are being delayed. There have also been stories of companies reducing the use of medical management and other actions to manage cash flow. All these factors contribute to unreliability of development data and very strong uncertainty in estimates.


Large Shifts in Exposures for Workers’ Compensation
Historical and projected payrolls will need to be isolated as best as practical. One suggestion is to adjust rates proportionately by NCCI class code. NCCI state average loss rates by common hospitality class codes are as follows:

Hotel 9052 Rest 9058 Sales 8742 Clerical 8810
Average 1.68 1.33 0.26 0.12
Relativity (to 9052) 100% 79% 15% 7%


You can see from the table that a shift in percent of payroll from “Hotel” to “Clerical” (a 93% reduction in average cost per $100 payroll) could have a pronounced impact on the underlying loss rate. Consideration to adjustment timing is also meaningful, as reopening of business will likely be gradual.

If there is a composition shift in exposures, actuaries will want to know how it has shifted both between and within these groups – between meaning percent of payroll in each bucket and within meaning how job duties may be different within each category.


  • Is there material “idle payroll” for furloughed/terminated employees?
  • Are staff now working from home (telecommuting)?
  • Are there new duties or staff duties considering the current environment?

Large Shifts in Exposures for General Liability

Here again composition matters. The most common exposure base for general liability is “revenue”; however, revenue per item sold may be less than historically received due to demand. As such, revenue only partially correlates as a measure of business volume. If this is the case, then historical revenue may need to be “right-sized” so that the basis is consistent. Flat exposure bases, like “square footage” or “room counts”, are the least responsive to changes in exposures as they do not account for use.

Whatever the exposure, discussions between the risk manager and actuary are important so that material changes in composition are fully understood and that proper adjustments are made in the forecast.

A change in exposure may also be due to alternative use or new exposures in response to COVID-19. There is not adequate data to determine if these groups have an increased or decreased rate of frequency or severity or, in some cases, know who is even responsible for these claims. Until that is known, the best practice is to identify and isolate these claims and to disclose how they are being handled with current understanding.


Large Shifts in Exposures for Auto Liability

Like “square footage”, “auto counts” are not going to be representative of exposures particularly if the autos are idle. Using a basis or adjustment related to actual use (perhaps adjusted revenue) may be prudent in the coming year(s).


Workers’ Compensation Loss Rates during Recessions and COVID-19

We are still in the preliminary stage of the impact this virus is having on our lives. We are aware of rocketing rates of unemployment, closures of non-essential business, and trillions of dollars in federal aid being circulated to businesses and consumers to keep them solvent. To some degree, we can look back at the recession of 2007–2009 to help predict workers’ compensation loss outcomes; however, in many aspects, that was a very different environment than what we are experiencing now.

There is evidence that during a recession, firms stop or slow hiring, and recent hires are the first to be laid off. These shorter-tenured workers tend to have higher frequencies and lower-severity claims. In some cases, employees are more likely to file a workers’ compensation claim for minor injuries or stress so that they can receive ongoing income. Therefore, the resulting recessionary environment is one of lower frequency but higher severity. Further, payrolls are often suppressed during these times. For some industries, the decrease in frequency offset the impact of severity increases, resulting in lower loss rates in 2008 and 2009; however, as businesses started to recover, 2010 and 2011 recorded some of the highest historical loss rates. It is recommended to look at how the recession impacted your organization to help determine if similar outcomes may be anticipated.


For additional information contact:

Beecher Carlson Insurance Services, LLC

Scott Hornyak, FCAS, MAAA


Please be advised that any and all information, comments, analysis, and/or recommendations set forth above relative to the possible impact of COVID-19 on potential insurance coverage or other policy implications are intended solely for informational purposes and should not be relied upon as legal advice. As an insurance broker, we have no authority to make coverage decisions as that ability rests solely with the issuing carrier. Therefore, all claims should be submitted to the carrier for evaluation. The positions expressed herein are opinions only and are not to be construed as any form of guarantee or warranty. Finally, given the extremely dynamic and rapidly evolving COVID-19 situation, comments above do not take into account any applicable pending or future legislation introduced with the intent to override, alter or amend current policy language.