Second Terrorism Hit Could 'Ruin' WC

Orlando, Fla.

The workers compensation insurance system has been rocked to itscore by the unforeseen risks of terrorism, industry experts meetinghere agreed.

The events of Sept. 11 “rewrote the script” for workers comp,leaving “90 years of progress placed at risk,” according to ChapinClark, interim president and chief executive officer of the BocaRaton, Fla.-based National Council on Compensation Insurance,speaking here at NCCI's Annual Issues Symposium.

NCCI reported that estimates for the ultimate Sept. 11 workerscomp losses are between $1.3 billion and $2 billion, with a netloss after reinsurance between $300 million and $1.2 billion.

Pointing out that Sept. 11 was the largest workers comp disasterever, Mr. Clark said that the systems insurers by law must coverclaims resulting from terrorism, while reinsurers can exclude suchclaims. Current rates do not carry any provision for terrorism, andstate regulators have been unwilling to approve a 4 percentsurcharge recommended by the NCCI to cover the exposure, headded.

Another Sept. 11 event, he said, could drive insurers intoinsolvency and expose the workers comp system to “financial ruin.”He also noted that workers' comp insurers, as participants in stateguaranty funds, would have to pay an additional price if any one ofthem goes under.

Among the factors reducing the Sept. 11 loss was the fact that15 percent of those killed or injured worked for self-insuredsemployers, and 20 percent were single victims without dependents,NCCI reported.

J. David Cummins, a professor of insurance and risk managementat the Wharton School of the University of Pennsylvania, noted thatwhile calculating the probabilities of terrorism losses isdifficult, the industry does have the underwriting techniques todeal with sparse data. Insurers have covered other events with alack of experience, he noted, giving satellite launches as anexample.

However, without a federal backstop, “youll see capital walkingaway,” predicted James Gevlin, a vice president for Swiss Re in NewYork.

Figures released by the NCCI at the meeting gave the latestavailable figures for the 2001 calendar year combined ratio as121–up three points over 2000. Less than two points of the increasewere attributable to Sept. 11 losses, NCCI noted. For the accidentyear, the combined ratio was estimated at 127 for 2001, comparedwith 133 in 2000, NCCI reported.

On the plus side, projections by NCCI called for workers comppremium volume to hit $27 billion in 2001, up about 9 percentcompared with $24.8 billion in 2000.

Terrorism is far from the industry's only concern, withofficials here citing rising losses, bigger reserve deficiencies, agrowing residual market, and possible signs of an uptick inaccident frequency as additional threats.

However, Ron Retterath, NCCI consulting actuary, said that inexamining the outlook for this year, as carriers focus on thebasics of good underwriting, “assuming there are no horrificevents,” it should be a transition period “to an extremely good2003.” If reinsurance capacity remains restricted, however, he isprojecting a combined ratio of 141.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 20, 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.