Prior to Sept. 11, U.S. employers were facing a hardening workers'' compensation market, meaning a likely increase in insurance rates. Since the terrorist attacks, however, the market not only has become "rock-solid" but may be all but disappearing for some employers.
That''s the assessment of several workers'' compensation experts as they analyze what companies can expect in 2002 when their policies come up for renewal. Some employers are more concerned about finding a primary insurance provider than the amount of rate increases, according to Andrew Fisk, CIH, CSP, accident prevention manager for Royal & Sun Alliance.
Two years ago, for example, an employer may have had six or seven insurance providers bidding for its workers'' compensation business. Now, Fisk said, that number may drop to one or two insurers, with the employer''s current insurer choosing not to renew.
The problem stems from reinsurance, which provides a way for a primary insurer to protect against unforeseen or extraordinary losses. Many reinsurers may choose to significantly reduce or exclude coverage for terrorism and acts of war. If a state requires a primary insurer to include this coverage, that insurer must carry the extra risk or decline to provide coverage, says Keith Bateman, vice president and director of workers'' compensation and health for the Alliance of American Insurers. Bateman notes reports that some reinsurers are even moving to exclude workers'' compensation catastrophe coverage.
If companies offer terrorism coverage, premiums could increase dramatically. Preliminary premium indications given prior to Sept. 11 materialized into actual quotes in many cases 50 percent higher than the original indication, says Christine Fuge, a senior research analyst for International Risk Management Institute (IRMI). Several instances were reported where insurers have withdrawn quotes due to the loss of reinsurance.
"To quote one broker, ''The give is gone.''" Fuge says. "Even excellent accounts can now expect to see significant price increases and fewer coverage enhancements being made available."
Mark D. Hansen, CSP, PE, CPE, who joined St. Paul a couple of months ago as director of risk control, oil and gas, recalls how several small companies he used to work with as director of environmental, safety and health at Weatherford were having a hard time finding workers'' compensation insurance providers. The main reason was Sept. 11''s effect on the comp market. "Any hardening that was going on will now be rock-solid," Hansen says.
Whether states take measures to ensure availability of workers'' comp terrorist coverage remains to be seen. "How much these issues will spill over into the state legislative arena may well depend on what happens with federal terrorism insurance legislation," Bateman says.
Insurers cannot absorb an infinite risk with finite resources, says Mark Webb of the American Insurance Association. "The industry cannot accurately predict loss, plan reserves or price their product. It is vital that Congress enact a federal mechanism to restore predictability and give insurers the tools necessary to return to the terrorism insurance market."
With uncertainty and the further hardening of the workers'' compensation market, a different approach to renewal than was utilized in a soft market is dictated, according to Christine Fuge, a senior research analyst for International Risk Management Institute. Following are some key steps to consider when developing a renewal strategy:
- First, begin the renewal process well in advance of the renewal date.
- Review the entire workers'' compensation program to ensure that total costs are balanced properly so that loss control, safety programs and claim handling are receiving the appropriate emphasis as part of the overall risk management effort to control costs.
- With premium costs rising, analyze the various program design options available. Is the use of deductibles, retros, self-insurance or captives feasible?
- For organizations with significant losses, learn more about the programs offered by workers'' compensation residual and competitive markets as these may become the only option available.
- Prepare a complete underwriting submission that clearly quantifies the organization''s exposures and losses and identifies the mechanisms in place to prevent and control future losses.
- Get all communications from the broker and insurer in writing. This is especially important in this market where several insurers have withdrawn quotes.
- Finally, prepare management for renewal pricing by apprising them of the condition of the workers'' compensation marketplace.
by Todd Nighswonger