Second Terrorism Hit Could 'Ruin' WC

Orlando, Fla.

The workers compensation insurance system has been rocked to its core by the unforeseen risks of terrorism, industry experts meeting here agreed.

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

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

Pointing out that Sept. 11 was the largest workers comp disaster ever, Mr. Clark said that the systems insurers by law must cover claims resulting from terrorism, while reinsurers can exclude such claims. Current rates do not carry any provision for terrorism, and state regulators have been unwilling to approve a 4 percent surcharge recommended by the NCCI to cover the exposure, he added.

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

Among the factors reducing the Sept. 11 loss was the fact that 15 percent of those killed or injured worked for self-insureds employers, and 20 percent were single victims without dependents, NCCI reported.

J. David Cummins, a professor of insurance and risk management at the Wharton School of the University of Pennsylvania, noted that while calculating the probabilities of terrorism losses is difficult, the industry does have the underwriting techniques to deal with sparse data. Insurers have covered other events with a lack of experience, he noted, giving satellite launches as an example.

However, without a federal backstop, “youll see capital walking away,” predicted James Gevlin, a vice president for Swiss Re in New York.

Figures released by the NCCI at the meeting gave the latest available figures for the 2001 calendar year combined ratio as 121–up three points over 2000. Less than two points of the increase were attributable to Sept. 11 losses, NCCI noted. For the accident year, the combined ratio was estimated at 127 for 2001, compared with 133 in 2000, NCCI reported.

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

Terrorism is far from the industry's only concern, with officials here citing rising losses, bigger reserve deficiencies, a growing residual market, and possible signs of an uptick in accident frequency as additional threats.

However, Ron Retterath, NCCI consulting actuary, said that in examining the outlook for this year, as carriers focus on the basics of good underwriting, “assuming there are no horrific events,” it should be a transition period “to an extremely good 2003.” If reinsurance capacity remains restricted, however, he is projecting 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Second Terrorism Hit Could 'Ruin' WC

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