Group Benefits Market Hit Hard By 9/11

Until reinsurers get a better handle on new risks in offering catastrophe coverage for group life insurance, they say carriers can expect steep prices when they can get it. That could spell big trouble for risk managers and their employee benefit plans.

For producers selling group life and health benefits, this new market reality will make it necessary to explain to employee benefit managers why premiums are skyrocketing.

In a post Sept. 11 world, the situation with life reinsurance–traditionally more stable than property-casualty reinsurance–is at least temporarily topsy-turvy.

Carriers, producers and buyers are left with the prospect of a significantly more expensive product, reinsurers are sorting out ways to handle risks that were unfathomable less than a year ago, and regulators and legislators are trying to play referee between squeezed consumers and a hard-pressed industry.

Just last month, reinsurance and terrorism led the topics discussed during the spring meeting of the National Association of Insurance Commissioners in Reno, Nev. Speakers emphasized the dearth of reinsurance available for group life insurance and said that failure to enact federal backstop legislation or another remedy would result in the loss of affordable group life insurance for the average American.

Reinsurers say that until they have more information, catastrophe reinsurance, the focal point of the debate on group life terrorism exclusions, will be scarce and expensive when it can be had. Increases cited range from 300-to-1,400 percent.

A distinction needs to be made between traditional group life reinsurance and group life catastrophe reinsurance, according to Chris Stroup, chief executive officer of Swiss Re Life & Health America in New York.

Traditional group life reinsurance is “vibrant,” but on the catastrophe reinsurance side, where the demand is hardest to meet, there will be less availability until more detail on underlying exposures can be determined, he noted.

In the traditional market, there is availability because, typically, not much group life is reinsured, Stroup says.

In 2000, only $20 billion of $921 billion of group life insurance face amount–approximately 2 percent of the market–was reinsured, he said. This compares with $985 billion of $1.6 trillion in face amount for individual life insurance, or 62 percent, he adds.

So, typically there is not much traditional group business ceded to reinsurers and, consequently, there is capacity, Mr. Stroup says.

“Change in risk management behavior is the fundamental issue,” he added. Necessary data to assess risk could be culled and made available in a relatively short time, Mr. Stroup said.

“From a life reinsurance viewpoint, we are much more aware of concentration-of-risk issues,” said Jim Senn, president of individual life and health with ING Re in Denver.

This is particularly true of corporate-owned life insurance and the key-person insurance business, according to Mr. Senn. For instance, the amount of COLI business in a particular transaction might get more scrutiny, he said.

This would include more questions about concentration of workers at company sites, whether those sites are high-rise or low-rise buildings, and where those sites are located, Mr. Senn added.

The emphasis on concentration issues that life reinsurance is now receiving is traditionally more indicative of property-casualty reinsurance, Mr. Senn continued. Property-casualty reinsurers are used to concentration risk from hurricanes and earthquakes, he said.

Concentration of risk has always been a concern, “it is just more in the front and center,” according to Mr. Senn.

“Catastrophe capacity is significantly reduced,” said Scott Machutt, director of the special risk reinsurance unit at ING Re in Minneapolis. Catastrophe capacity was close to $1 billion industrywide, and is now down to approximately $150 million, he noted.

Mr. Machutt said that ING Re exited the catastrophe reinsurance business in November 2001 for business reasons.

However, the upward cost trend that started late last year is continuing, he added. Whether companies buy catastrophe reinsurance coverage depends on factors such as whether their boards of directors require the purchase of such insurance.

Pricing, according to Mr. Machutt, would have increased anyway, but the terrorist attacks of Sept. 11 created a “time warp.”

Because of concentration risk, more detailed information such as concentration by ZIP code is needed, he said. But even here, a reinsurer needs to be careful, he added. A ZIP code listed might be for the home office and not for a branch office with a heavy density of employees, Mr. Machutt noted.

Direct writers can consider options such as quota-share arrangements with a higher fixed net retention per life, he continued. So, for instance, an insurer might retain $500,000 in risk rather than $250,000.

A higher net retention might be suggested that would still allow a company to attain its financial target, such as an internal rate of return or gross underwriting margin, he explained.

In addition to requiring more information on concentration risk, maximum event limits are also being written into contracts, he said.

The definition of occurrence will also differ with different provisions for geographic limits and proximity of time, Mr. Machutt said. So, a contract might specify a 50 or 100-mile radius and a time limit of 24 hours, he added.

In many cases, coverage for nuclear, chemical and biological weapons are just being excluded, Mr. Machutt noted.

Cost will also depend on whether the contract has a “risk attaching” or a “losses occurring” provision, he explained. If “losses occurring” is included, then any losses are covered only for the term of the contract, but if there is a risk attaching provision, there would be coverage for a year after the last day of the contract, Mr. Machutt explained.

If the risk attaching provision is still available in reinsurance contracts, direct writers are going to have to pay for it, he said.

Another option is the use of retrocessional reinsurance, said Wayne Adams, a senior vice president of sales and marketing with RGA in St. Louis. However, at this point it is an expensive option, he added.

“There is a disconnect between reinsurance rates and retro rates,” Mr. Adams said. There are fewer players and less competition in retrocessional coverage, he explained.

The whole reinsurance risk reevaluation that is underway could impact the availability of reinsurance in urban areas, Mr. Adams warned.

In addition, this could lead to new ways of reducing risk, such as swapping of risk concentrations, he said.

The market for catastrophe reinsurance will return under the proper conditions, predicted Nick von Moltke, U.S. business leader for global life and health with General Electric Corp.'s Employers Reinsurance Corp. in Overland Park, Kan.

While it could take longer for the market to adjust to the new environment, “I would like to think that we are in a trough now,” said Bob Diefenbacher, U.S. pricing leader as well as second vice president and actuary with ERC's Global Life and Health.

The market will adjust when data is available, he said, and since the information is out there, if it was provided today, that could be almost immediately.

Jim Connolly is a senior editor with NU's Life & Health/Financial Services edition.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Group Benefits Market Hit Hard By 9/11

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