Terrorism Tops List of Concerns for Workers’ Comp Professionals

Industry executives in the workers’ compensation field from across the nation gathered in Las Vegas Feb. 5-6 for the 5th Annual AMCOMP (American Society of Workers’ Comp Professionals Inc.) Meeting & Conference. The two-day conference featured several panels and seminars, covering issues such as carrier insolvencies, workers’ compensation best practices, medical management, bad faith and more.

Topping the issues of concern for workers’ compensation insurers and industry executives was terrorism, according to Richard Palczynski, former Group senior vice president & chief actuary of Hartford Financial Services Inc. “TRIA [Terrorism Risk Insurance Act of 2002] did indeed stabilize the market,” he said in a seminar titled “State of the Line Overview & Large Deductible Trends.” With an expected sunset date of Dec. 31 2005, it is unlikely that TRIA will be extended.

“In the structure of TRIA, Washington believed that the industry could build capacity over three years and therefore after three years we wouldn’t need federal protection,” Palczynski said. “The industry is collectively putting away across all companies $300 million a year. The World Trade Center cost is fairly widely identified as $2 billion. That number could have been $20 billion had we not had the 45 minutes to evacuate the buildings or had the event happened at 10 a.m. instead of when it did. If that event had happened in Massachusetts where fatalities are four times as expensive as in New York, the $2 billon could be much greater.”

Palczynski referenced an EQUECAT model that revealed the possibility of future workers’ comp losses exceeding $50 billion before TRIA. The model depicted a 1 in 500 chance at a $47.6 billion loss, which under TRIA, would be only $8.8 billion after federal recovery. “TRIA plays a very significant role today,” he explained. With TRIA in force, insurers would be wounded by further catastrophes, but could still survive.

“The entire industry surplus backing up workers’ compensation is about $30 million,” Palczynski added, noting that the industry doesn’t allocate surplus to line, but if they did it would probably be a one to one ratio to premium. “A terrorist event with significant probability based on the experts could easily wipe out the entire surplus industry wide and countrywide behind the workers’ compensation line.”

The highest terrorism risk occurs in the lowest-rated classes, which includes office and clerical workers.

Palczynski also discussed a voluntary terrorism pool that would work under a federal backstop, therefore better utilizing the capacity of the industry, likening it to models of other countries that have successfully formed such pools, including Great Britain. These solutions, he said, have several points in common, including voluntary pooling; government sharing in revenue; insurers pooling exposure to spread risk and increase capital efficiency; private reinsurance is purchased by the pool to increase capacity; and reserving for terrorism is allowed for tax purposes.

He concluded that TRIA coverage is critical to the industry; especially in the workers’ comp line as terrorism coverage cannot be excluded. Palczynski also cited the industry’s insufficient ability to build capacity at an affordable rate in a short amount of time in order to absorb the terrorism risk alone in the foreseeable future. He supported further exploration into the concept of voluntary pools, citing the potential to use industry capital more efficiently by funding the risk retained under TRIA and accessing reinsurance market capital.

He further noted that of the top 25 workers’ compensation carriers in 1982, five have gone into insolvency, 10 have merged with another company or have been sold, and two have withdrawn from the market. As of 2002, California’s State Compensation Insurance Fund was the largest writer of workers’ compensation, followed by AIG & Liberty, writing workers’ comp across the nation.

“We now have St. Travelers, instead of Travelers and St. Paul, and Royal and Kemper are out of the business,” Palczynski said. “Already one year later, four of the top 10 carriers have either gone out of the business or materially changed in structure.”

Douglas Dirks, CEO of Employers Insurance Company of Nevada, opened up the conference with a keynote speech in which he discussed the practices of his company and the current state of the market. Among the current trends, Dirks noted the increase in mergers and acquisitions in the insurance industry, of which there have been more in 2003 than in 2001 and 2002 combined. “We think that’s very much going to influence the behaviors of the industry, and expect there will be much more going forward.”

Other areas of concern Dirks noted include the reserve inadequacy in the marketplace, a great deal of uncertainty in the regulatory marketplace, a renewed focus on underwriting to produce investment results in lieu of lagging interest rates, the reinsurance market and continued pressure for cost containment in the medical arena.

William A. Rabl, senior vice president and chief underwriting officer at ACE Risk Management, cited the industry’s poor performance in the area of underwriting workers’ comp, noting that the industry had not made an underwriting profit since 1978.

In a panel discussion titled “Successful Underwriting, Proven Strategies that Work,” Rabl said that while the frequency of loss is decreasing, claim severity has gone up, which has a compounding effect on the excess premiums. Additionally, he noted, for the first time in history, the medical portion of claims are now greater than the indemnity, a trend that Rabl expects to continue.

“We’re still in the tail of a hard market from a pricing standpoint, but prices are definitely starting to increase at a lower rate,” Rabl said, estimating a 10 percent increase on the comp side.

From 1992 to 2002, there was a prolonged period of time in declining of frequency, said workers’ compensation consultant Raymond Jacobsen. “Is that due to macroeconomic issues or is that due to some other issues?” he asked. “What’s going to happen to frequency over the next decade?” Jacobsen said that according to NCCI data, there’s a 13 percent probability that frequency would continue to go up or possibly level off.

Jacobsen cited the many changes and reforms that occurred over the past decade which have affected the comp marketplace by reducing frequency, including the mandates of fraud provisions, deregulation of labor and a change in job distribution from a manufacturing sector to a services sector. “Some even suggest that there’s been a stronger emphasis in the last decade on the area of safety. OSHA’s work has had and will continue to have meaningful changes within our system.

“Another dynamic that is influencing frequency is an expanding language barrier where people are really just not familiar with what workers’ compensation is or there isn’t a knowledge of how to communicate when somebody has a physical problem,” Jacobsen continued. “I think we’ve had a unique period over the last 10 years that has driven this prolonged period of declined frequency …. I think the important issue for all of us as underwriters is to come to a realization that we need to resource at some point in time our thinking that frequency is not going to continue to decline. It can’t go down to zero. It has to level off at some point in time. The question is when is frequency going to level, when is it going to go up, and I think we need to resource ourselves to that inevitable issue.”

Jacobsen noted in particular the role frequency plays when it comes to ratemaking. As for severity, he said, “If you go back to 1911, severity is inevitable in this system. There are various periods of times, like the reforms in the 90s, when severity slows down, but over the long term, we can expect that severity will go up within the workers’ compensation system.” Also expected to increase are indemnity and medical inflation. Jacobsen also emphasized the importance of breaking down frequency and severity on a state-by-state basis.

In addition, the Donald D. DeCarlo “Legends of Workers’ Compensation Awards” were presented. Honorees included Carole Banfield, executive vice president of Insurance Services Office Inc.; Michael Stinziano, vice president, Benfield; and Kenneth J. Ross, executive director & CEO of the New York State Insurance Fund. The awards recognize the individuals as “Honorary WCCPs,” for their lifelong, outstanding achievement in the workers’ compensation field.

AMCOMP also recognized their most recent recipient of the WCCP (Workers’ Compensation Certification Program) Educational Designation, Marcus Pryor of Peter Pryor & Associates.

Topics Catastrophe Carriers Natural Disasters Workers' Compensation Underwriting Market