WC Buyers Caught Between A Rock And A Hard Place

Due to terrorism concerns, risk managers whosecompanies have large concentrations of employees and those in urbanareas are finding that workers' compensation coverage, if they canget it at all, involves "exorbitant" rates, according to a Standard& Poor's study.

Making the situation even worse for many big employers is the factthat going to surplus lines carriers is not an available option,said Fred Sklow, director of insurance ratings for S&P in NewYork.

Mr. Sklow said that regulators require that employers get theircoverage with insurers admitted to operate within their states,which have the backing of their state guaranty funds.

S&P made inquiries to five states concerning the use of surpluslines, non-admitted insurers for workers comp coverage. Mr. Sklowrelated that the response "across-the-board was, No, you have tostick with the admitted market."

S&P also noted that, unlike other types of coverage, workerscomp insurers are not permitted to exclude losses caused byterrorism in their underwriting contracts. Workers' comp writersare therefore trapped between ongoing exposure to potentiallydevastating payouts, on the one hand, and the removal of their ownprotection against losses to terrorism through reinsurance, on theother. That safeguard lapsed with the Jan. 1, 2002, renewal periodfor reinsurance contracts, S&P pointed out.

S&P reported that since last Septembers attack on the WorldTrade Center, premium increases have ranged from 30-to-50 percent,while those who suffered terrorism losses are being hit with ratehikes from 50-to-100 percent.

Don Watson, director of S&Ps financial services ratings, saidthe coverage that employers need might be provided by new startupcompanies in Bermuda that "have an appetite for workers comp." With$7 billion in capital on hand, they are looking for business, hesaid. In the S&P report, he noted that Bermuda firms areunencumbered by poor underwriting experience from previous years,and are getting "an incredible price" for providing coverage.

"If you avoid the supertrophy buildings like the Sears Tower or theEmpire State Building, maybe its not such a bad risk," hespeculated in the analysis.

For many employers with 1,000 or more employees, he said, thepolicies they obtain will include deductibles that "are going to behuge." Many employers might decide to self-insure, he added.

Mr. Watson said the problem is not just for urban employers, butalso for major suburban firms, where insurers calculate they willstill be vulnerable to nuclear, biological or chemicalattacks.

Both Mr. Watson and Mr. Sklow noted that the new element in workerscomp pricing is a realization of the high losses that can besustained with high concentration of employees in job categorieswith a low risk factor.

The concentration factor, Mr. Sklow said, is one with whichunderwriters and actuaries must now grapple. S&Ps analysis saidthe insurer reaction will probably be an avoidance of concentratedrisk in any one geographic area.

Mr. Watson said the potential for a big concentration loss fromevents such as an earthquake has always been present, but thatinsurers had ignored it. For example, Californias Northridgeearthquake in 1994 could have caused major death and injury toworkers, he suggested, but it luckily occurred in the early hoursof the morning when people were not at their job sites.

S&Ps study noted that monoline insurers that specialize inworkers comp and those that write in only one state are at greatestrisk from the increasing threat of terrorism.

In the past, Mr. Sklow noted, most workers' comp pricing decisionsdepended on the insured company's payroll, the type of industry,the workers' job functions, the head count, and historicalexperience for the company. Now geographic location andconcentration of workers are also major factors.

S&P said that in the long-term, prudent risk management shouldmake workers comp a profitable insurance line. The analysts alsoforecast that the current surge of premium increases will probablynot continue into next year, because prices will be cut ascompetition for business arises.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 4, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

Contact Webmaster