Terrorism, Drug Costs Put Heat On WCCarriers

After a string of bad years, the workers' compensation insurancesystem seems ready to move into the black, but making profits inthe face of a heightened terrorism risk and soaring prescriptiondrug costs will be a tricky business, according to industryprofessionals.

As the market now stands, “it can only get better,” said RonRetterath, an actuary for the National Council on CompensationInsurance in Boca Raton, Fla.

NCCI data shows that the calendar year combined ratio of claimsand expenses against premium dollars for 2001 “will turn out to bethe worst year ever” for workers comp, Mr. Retterath said. Heexplained that the period encompasses 90 years, going back to 1911when the workers comp system was created.

NCCI, using A. M. Best Company data, said the 2001 calendar yearcombined ratio was 129, up from 118 the year before. The 2001accident year ratio was put at 133, with a question markattached.

An accident year looks at a years revenues against its estimatedtotal costs–both paid and reserved-for accidents in that year. NCCIsaid that Sept. 11 losses would account for eight points of theuncertain 133 figure. In 2000, the accident year ratio was also133–a seven point decline from 1999.

Meanwhile, the rising volume of painkilling and othermedications prescribed for injured workers, along with soaringcosts for these drugs, are sending workers' comp costsskyrocketing, posing another loss control challenge for carriers, astudy by The Hartford Financial Services Group has found (seerelated story on page 11).

Joseph Gilles, recently promoted to president and chiefoperating officer at Liberty Mutual subsidiary Wassau Insurance,gave his view of the market during an interview while still servingas Liberty's executive vice president for commercial markets. Hesaid the workers comp insurance giant has a positive attitudetoward the business because, “we believe we know how to do it,” andLiberty is “optimistic about our capabilities.”

In the short-term he foresees several companies doing well,while “some companies will struggle.”

Mr. Gilles outlined Liberty's strategy, based on the premisethat no one knows how Congress will ultimately react to calls for afederal reinsurance backstop for terrorism losses.

In the post Sept. 11 climate, he said Liberty has been able tofunction using some unexpired reinsurance coverage that had beenpurchased before the attacks, and some “that I paid a lot for.”

The strategy, he said, is to avoid some customers, buy expensivereinsurance, and structure rating plans carefully.

Mr. Gilles said that Liberty is avoiding customers who have toomany employees in one place. He noted that some states have deathbenefits in the $2 million-to-$3 million range. Had the World TradeCenter toll been 10,000 instead of 3,000, “just think of thedollars,” he remarked.

In California, where the company perceives the legal system tobe out of control and the benefit system unsound, “were going tomaintain a low profile,” Mr. Gilles said.

Nationwide, he said his company is concerned by the increasingnumber of litigated claims, the uncertain nature of the economy anddouble-digit medical inflation. To handle its costs, Liberty Mutualis increasing prices 15-to-20 percent for middle-market customersand 20 percent for large employers with $500,000 deductibles.

On the positive side, he noted accident frequency through lastyear had not stopped declining. He attributed that to automationand the nations shift away from manufacturing to a serviceeconomy.

Mr. Gilles said he expects frequency will stay low because “inAmerica, people worry about employees,” and risk preventionactivity gets a little better every year.

Vince Donnelly, president and chief operating officer of PMAInsurance Group in Blue Bell, Pa., agreed that for the industry,“while there have been a lot of negatives, one thing thats beenpositive is that frequency of comp claims has been down.”

Mr. Donnelly said underwriting discipline in the industry isbeginning to take shape even as it is impacted by healthcare costpressures and a negative economy, which he said can lengthen theduration of claims.

In a climate of increased terrorism risk and reinsurancescarcity, he said the strategy is to carefully write eachemployer–not just obtaining the number of workers in various riskcategories, but asking how many employees are at one location atthe same time, and “what else is around that has potential exposureto the terrorism threat?”

Mr. Donnelly said he thinks that workers comp premium increaseshave generally been in the 15-to-20 percent price range. While notexactly bullish, he said of the workers' comp market, “barring acatastrophic event in 2002, we should see improvement.”

Keith Bateman, vice president and director of workers comp andhealth for the Alliance of American Insurers in Downers Grove,Ill., said whether accident frequency remains level or decreases isthe key to a good combined ratio. However, he cautions, “it may betwo or three years before things start turning around.”

Mr. Bateman said there is a concern about reaction in statelegislatures to rising workers comp insurance prices for employers.“Will they go back in and change loss-cost and competitive ratinglaws to get more regulatory control over insurer pricing changes?”he wondered.

Mr. Bateman also took note of the exposure that insurers havethrough their participation in state guaranty funds, and hesuggested that even if a carrier avoids terrorism risks in bigcoastal cities, “we dont know if the next attack wont hit a groupout in Main Street America.”

He said there are reports circulating in the industry ofcompanies having difficulty collecting on their reinsurance claims,and he believes that there will be additional insolvencies in theworkers comp sector.

“You cant conclude in a hard market there wont be failures,” hecautioned. Mr. Bateman noted that NCCI estimates that the industryis under-reserved by $20 billion, and advised that “if theres aterrorism attack, all bets are off.”

Even as the market hardens, he pointed out, medical andindemnity costs for workers comp are increasing.

Ken Martino, senior vice president of Specialty Risk Services, asubsidiary of The Hartford, said that while the current loss-costsituation is a bad one, the industry will survive it.

“I lived through the 1980s, when things were so bad they usedterms like apocalypse. We will get through this. Its always been aresilient market that met the challenges,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 6, 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.