Workers’ Comp: End of an Error

Workers' compensation insurance premiums have barely budged in years. They're budging now.

Blame the insurance cycle.

After years of minuscule rises in the cost of workers’ compensation insurance — and even a few decreases — rates are starting to go up substantially. Add in the impact of 9/11, and corporate managers could find themselves deep in the hole after paying their workers’ comp premiums this year.

The numbers are worrisome. Managers at insurance broker Marsh expect workers’ comp rates to increase by 20 percent to 40 percent during the course of the year. Even before September 11, a study by insurance research firm Conning & Co. found that nearly one-third of the 30 largest workers’ comp insurers planned overall rate hikes for all industries in excess of 20 percent for 2002. A 20 percent spike is a slight departure from increases from 1998 to 2001, to say the least. During those years, the average workers’ comp policy premium rose a microscopic 1.5 percent, according to Conning.

Other than 9/11, what’s fueling these sizable increases in policy premiums? Mostly, escalating medical bills. Over the past two years, health-care-related costs have jumped an average of 15 percent. That in turn, has put pressure on workers’ comp carriers to raise premiums. But Timothy Brady, managing director at Marsh Inc., says that during the late ’90s, carriers seemed committed to maintaining market share by holding the line on rates — even if it meant taking losses on workers’ comp policies.

But those losses have now turned ugly. According to recent estimates by consulting firm Tillinghast-Towers Perrin, the September attack pushed claims for workers’ comp up by $3.5 billion, or 12 percent above the expected level of claims for the year. Under more normal circumstances, losses for the entire workers’ comp industry in 2001 would have likely come in around $30 billion.

That’s a huge spike for a line of insurance not usually subject to catastrophic claims. “Although you can have catastrophic claims in construction, they would number in the dozens of deaths,” says Stephen Lowe, a managing principle at Tillinghast. By contrast, Lowe says the workers’ comp losses stemming from 9/11 are “staggering in comparison to the normal variation in workers’ comp losses year over year.”

Compounding the problem: Many carriers have exhausted the benefits of the loss control they’ve been promoting to their customers. “The insurance industry has been focusing on loss control for years,” says Brady. “After a while, all the benefit is realized and there is nowhere else to go.”

Another moderating factor in workers’ comp rates, the bull market, has also vanished. Insurers, after all, were usually able to offset underwriting losses with gains from stock investments. But with the onset of the bear market, those gains have turned to debits. Says Brady, “Now insurance companies have a lot of making up to do.”

A Whole Lot of Fear

Through August, carriers seemed to be doing just that. Purchasers of workers’ comp policies told of rate increases of about 15 percent. But 9/11 has made matters a whole lot worse for insurance buyers. “Suddenly, carriers have to contemplate the kind of catastrophic loss that wasn’t considered before,” says Brady.

Indeed, unlike guidelines for other lines of insurance, regulations in most states require that workers’ comp policies include acts of war, including terrorism. And the threat of terrorism — especially that of bio-terrorism — has never been greater.

The abnormal variation in workers’ comp losses triggered by the terror attacks is still being played out. The large-account primary underwriters who write business for companies with large pools of employees are rethinking how much catastrophic reinsurance coverage they need, says Tillinghast’s Lowe. For instance, an insurer who had reinsurance coverage for $100 million for a single event might have well ended up incurring as much as $300 million in claims related to 9/11.

When insurers get slammed like that, you can bet they’ll be looking for additional reinsurance the next go-round. And reinsurers know it. “Reinsurance is becoming more expensive to carriers, and that cost is going to be passed on to purchasers,” says Geri Riley, assistant vice president at researcher Conning. Things got worse on the reinsurance front when Congress adjourned in December without passing a cap on future insured terrorism losses. Says Riley: “There’s an element of fear among workers’ comp insurers.”

In fact, Riley says some carriers are declining to underwrite policies for companies that would never have had a problem purchasing a policy in the past. Even good risks are starting to assume more workers’ comp risk themselves rather than pay exorbitant premium hikes. Many are moving to higher deductibles or taking a hard look at beefing up their self-insured retentions or their use of offshore captives. “The bottom line,” says Riley, “is that companies are paying more and getting less.”

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