Workers'' compensation is one of the insurance lines most acutely affected by the terrorism of 2001 and by the continued absence of government backstop insurance for terrorism events. And it is fast becoming a high-priced thorn in the side for U.S. companies seeking coverage for their employees, Standard & Poor''s said in a new report released yesterday.
"Choose your poison," said Fred Sklow, a director in Standard & Poor''s insurance ratings group. "If you''re a company with a large concentration of employees, you may find yourself paying an exorbitant premium or even that insurance companies don''t want to write the risk at any price."
Since the attacks on the World Trade Center, minimum premium increases are in the 30-50 percent range, he said, but for companies with loss experience, price hikes of 50-75 percent or even 100 percent are the norm. Moreover, when companies do pay up, they must accept tighter terms and conditions for workers'' compensation coverage.
"In a slowing economy, companies can ill afford higher costs, but for those with high concentrations of employees in one location, premium-rate increases of 50 percent are common; and that is if coverage is even available," said Don Watson, a director in Standard & Poor''s Financial Services Ratings group.
"We are seeing insurers pulling back from workers'' comp, and I think there will be more of that as they conclude how difficult it is to write. Insurers are thinking, ''If government''s not going to backstop me and reinsurance is not going to apply to terrorism, I have to limit my exposures.'' That''s going to drive rates up even more."
The crucial factor underlining workers'' compensation difficulties, as opposed to other types of coverage, is that insurers are not permitted to exclude losses caused by terrorism in their underwriting contracts. This restriction is enforced by the insurance departments of states where insurers are licensed, even though with the exception of New York and California, the states have generally fallen in line with allowing terrorism exclusions for other lines of insurance, particularly after Congress failed in 2001 to pass legislation that would backstop any future insurance losses to terrorism. (See related article, "Employers Face Workers'' Comp Rate Hikes ... If Insurance Is Available.")
Workers'' compensation writers are trapped between ongoing exposure to potentially devastating payouts on the one hand, and the removal of their own protection against losses to terrorism through reinsurance on the other hand. That safeguard lapsed with the Jan. 1, 2002 renewal period for reinsurance contracts.
"Insurers are squeezed because they can''t exclude terrorism, while their reinsurers can," said Sklow.
In the near term, conditions in U.S. workers'' compensation coverage will cut into the income statements of employers, but the market should regain a more even keel by the end of 2002. "The increases you''re seeing now will probably continue through year-end, but probably not at this pace into 2003," said Sklow. "After a while, the competitive element has to come into play. If a government backstop can be implemented in the meantime, this will also likely have a softening effect on prices."
The full report, "The Workers'' Compensation Dilemma," is available on RatingsDirect, Standard & Poor''s Web-based credit analysis system. A copy of the report can also be found by visiting www.standardandpoors.com/Forum/RatingsCommentaries/Insurance and clicking on "Property/Casualty."
by Sandy Smith ([email protected])