A workers' compensation marketplace that was already in a tailspin at this time last year continues to try to right itself in the aftermath of the events of September 11. Those catastrophic events have brought new complexities, raised new underwriting is. sues and generated huge losses for reinsurers. All this has been superimposed on a market grappling with years of adverse experience created by product underpricing. This article will take a look at market conditions and provide some suggestions that might help keep your premium increases to a minimum.
Factors behind the Hard Market
The National Council on Compensation Insurance (NCCI) estimates the 2001 accident year combined ratio to be 127 percent. This ratio (losses and premiums paid in a calendar year) is one of the yardsticks used by the insurance industry to gauge the profitability of workers' compensation insurance for a given year. A combined ratio below 100 percent is indicative of an underwriting profit. Although 127 percent is not a great result, it is an improvement over 1999 and 2000 when the accident year combined ratio was 137 and 133 percent, respectively. On the surface, the figure would indicate that loss experience on the product lines is improving, but these statistics do not reflect a couple of important factors that will impact the actual pricing forecast for the line.
According to NCCI, the 2001 accident ratio is likely to go up only 1-4 points as a result of September 11 workers' compensation claims, since the vast majority of the losses were ceded to reinsurers. The future pricing of workers' compensation insurance will certainly be driven in part by reinsurers looking for some way to recoup these losses. Also, both indemnity and medical claim costs continue to escalate and, unless brought under control, workers' compensation costs--and ultimately pricing--will continue to increase.
In addition to creating large reinsurance losses, the workers' compensation terrorism exposure revealed by September 11 has produced new underwriting concerns that have led to many reinsurance treaties excluding terrorism. Underwriters and reinsurers are looking at their aggregation of exposures at any one site and shying away from employers with concentrated work forces in high-rise buildings.
Unlike some of the other lines of insurance, workers' compensation is statutorily based, and insurers are not free to deviate from what the state statutes require to be covered. The only state whose statute provides a possible exclusion for losses resulting from terrorist activity is Pennsylvania, where Section 301(a) of the Workers Compensation Act excludes losses resulting from "enemy sabotage from a foreign power." On the other hand, some 30 states will not allow workers' compensation terrorism exclusions: Alaska, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin. (1) Illinois has approved a terrorism exclusion for use on excess workers' compensation for self-insured employers, but excess workers' compensation insurance is optional for individual self-insureds.
While primary insurers cannot exclude terrorism, their reinsurers can and are doing so. The inability to cede some of the risk to reinsurers has led many insurers to decline to write employers perceived to be especially vulnerable to large losses in a terrorism attack. For example, employers in major cities with large concentrations of workers in high-rises--historically, an easy-to-place, low premium and exposure risk--are finding renewals problematic for the first time.
Self-insured employers and captives are encountering similar problems with their excess workers' compensation insurance or reinsurance. …