WC Softening, But Underwriters Still Rule

Insurers pin hopes on reform in key states, but fearnon-renewal of TRIA

As the line of commercial insurance most subject to the vagariesof the political and regulatory winds blowing in any particularstate at any particular time, workers' compensation has always hadits challenges in turning an underwriting profit.

Today those challenges are exacerbated by a softening commerciallines market, but regulatory changes could be a carrier's bestfriend this year as big states such as Illinois and Texas look tooverhaul their systems with the ultimate aim of reining incosts.

Jennifer Tomilin, vice president and chief underwriting officerfor workers' comp at Chicago-based CNA, said she was encouraged bylegislative activity in two states. “What I saw happen inCalifornia and Tennessee last year was extremely positive,” shenoted.

However, as the actual regulations are promulgated in Californiato implement reforms hashed out last year between lawmakers andGov. Arnold Schwarzenegger, look for some political backlash andefforts to rewrite some of the law. (See related story on coverpage.)

In Tennessee, Insurance Commissioner Paula Flowers last yearordered with great fanfare a 6.3 percent cut in the workers comp“loss costs” figure, which is used to set rates throughout thestate. She said the $69.4 million savings that state employers willenjoy resulted from reforms signed by the governor that, amongother changes, lowered the multiplier on permanent partialdisability benefits and eliminated the requirement for casemanagement services.

Also, under the new law a new medical reimbursement rateschedule goes into effect this July, which Ms. Flowers said willlikely lead to rate adjustment and additional savings.

Industry leaders see evidence of a softening market, but GiggyMartindale, workers' comp product manager for The Hartford, saidthat despite this trend, “overall, the line should beprofitable.”

“There is definitely a lot of competition out there. For themost part, we are getting the pricing we need, and if we cant getthat pricing, then we walk away,” he said. “We need to exerciseunderwriting discipline and not make those same mistakes we allmade back in the 1990s.”

Mr. Martindale sees regulators and legislators in a variety ofstates looking at legislation to control costs, but also notes thatregulators at the same time have imposed more reportingrequirements that ultimately drives up the cost of providingcoverage.

Ms. Tomilin also sees some market softening but no free-fall inprices. “What I have noticed is that there seems to be morecompetition for the higher layers for the large-deductiblepolicies,” she said.

Large-deductible policies have been the subject of someregulatory concern, particularly at National Association ofInsurance Commissioners meetings, but attempts to create someguidance in the form of a White Paper seem to have petered out forthe time being.

“In the small middle-market, there has been a little bit ofsofteningbut the national players are at flat [rate renewal] orjust a little bit under what it was last year,” Ms. Tomilin said,“so I have not seen an aggressive turn in these marketsegments.”

The Risk and Insurance Management Society Benchmark Survey ofrisk managers for 2004?s fourth quarter confirms that not everyoneis seeing prices fall. Indeed, “workers' compensation premiums,driven by diverse conditions on a state-by-state basis, showedmixed results for the quarter, but on average experienced a slightuptick in premium levels (1.5 percent) across the country,”according to David Bradford, executive vice president for NewYork-based Advisen Inc., which conducted the survey.

Texas and Illinois are shaping up as the big battleground statesfor workers' comp reform.

One of the main components of the package proposed in Texas isallowing the use of networks of medical providers to handle claims.The Cambridge, Mass.-based Workers' Compensation Research Instituteestimates that networks reduce costs between 16 percent and 46percent if all treatment is provided by network members. Reformersalso hope to end the practice of workers' comp claimants seeingchiropractors first before seeing a medical doctor.

In Illinois, Gov. Rod Blagojevich will once again attempt togain passage of some workers' comp reforms after attempts to passmeasures last year failed, such as the imposition of feeschedules.

Wisconsin would seem a ripe target for reform, but so far only astudy group has been formed to look at rising costs. A recent studyby the WCRI put the Badger State at the top of the list with anaverage claim cost of $1,044 in 2001-02. The median for the 12states studied was $644. (Wisconsin is one of only three statesthat does not allow use of a discount medical network or medicalschedule fee set by regulators.)

In Oklahoma, Democratic Gov. Brad Henry introduced a reformpackage that focuses on encouraging mediation rather thanlitigation and strengthens fraud-fighting tools in thegovernment.

For the few remaining states with monopolistic state funds,privatization may be the answer.

Earlier this month, the West Virginia Legislature approved anoverhaul of the state workers' comp fund that will transform itinto a privately-operated employers? mutual plan by year's end. Thebill would also authorize $300 million to pay off the system'sunfunded liabilities.

Democratic Gov. Joe Manchin, who took office this year,predicted that workers' comp premiums should decrease by 10-to-15percent next year. He said that the state could not create any morenew jobs until the system had been fixed. (Private carriers willnot enter the market until 2008.)

Keith Bateman, vice president of the Des Plaines, Ill.-basedProperty Casualty Insurers Association of America, said it is tooearly to tell if the private market will find a hospitableenvironment in West Virginia. “There are just too many issues thathave to be resolved before we can make any such judgments,” hesaid.

Flag: Expiration Looms

Head: WC Outlook Grim Without TRIA

By Steven Tuckey

Hanging over any discussion of workers' comp is the possibilitythat Congress will not renew the Terrorism Risk Insurance Act, setto expire at year's end.

Workers' comp insurers cannot exclude terrorism from theirpolicies, and the loss of TRIAs federal reinsurance backup wouldleave carriers exposed and employers in high-risk areas hard put tofind affordable coverage.

“If it is not renewed, we will have to take some underwritingaction to limit our exposure to an acceptable level of risk,” saidGiggy Martindale, workers' comp product manager for The Hartford.“I really cant get into a lot of details and I dont want tospeculate, but we will take the appropriate action.”

For a line already facing capacity challenges, the non-renewalof TRIA will only leave the market worse off, according to JenniferTomilin, vice president and chief underwriting officer for workers'comp at Chicago-based CNA.

“One of the things that worries me the most is that somecarriers may not have the surplus and capacity, and if acatastrophic event occurred it could totally wipe them out,” shesaid. “Those unfunded losses would result in increased residualmarket loads or assessments against the remaining carriers, whichwould not only take on losses within their own very highself-insured layers but a portion also of unfunded losses ofsmaller carriers. So from a matter of economics, it will become acapacity issue.”

Reproduced from National Underwriter Edition, March 4, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.