IN 2004, the workers compensation system appeared to build onits rebound from the depths the market reached between 1999 and2002. While no figures for the year are yet available, anecdotalevidence suggests that the trends that were evident in 2003-climbing premium volume, lowering loss ratios and a better returnon investment-had a good chance of continuing. The outlook istempered, however, by such factors as medical inflation, lack ofprogress toward reforms in some states and above all by theuncertain future of the federal Terrorism Risk Insurance Act.

To obtain some perspective on what agents and brokers can expectin the year ahead, I recently contacted the National Council onCompensation Insurance, as well as two insurers and two MGAs activein the workers compensation market. Their assessments follow.

National Council on Compensation Insurance

As the workers compensation market entered 2005, Peter Burton,senior division executive for state relations at NCCI, soundedrelatively upbeat. Reforms have been approved in a number ofstates, he noted, insurers' loss reserves are improving, and thefrequency of injuries in many states has hit an all-time low.

“We're pointed in the right direction,” Burton said. He added,however, that the line still is not making money, so carrierscontinue to underwrite conservatively.

NCCI files advisory loss costs and, in a few cases, advisoryrates, for workers compensation insurance in 36 states. Its filingcycle runs from July 1 to June 30. As of last month, NCCI hadcompleted about 85% of its filings for this cycle, Burton said.Nineteen were for loss-cost increases, 12 were for decreases andone was for no change. State regulators had approved about 90% ofthe filings “as is,” he said.

Loss costs actually have improved more than those numbers mightindicate, Burton said. In Florida, rates are decreasing by 5.1% byorder of the insurance commissioner, and in Illinois NCCI has filedfor an increase of just one-tenth of 1%. Burton said the filings inthose two states, the largest for which NCCI makes filings, morethan offset the increases sought in small-premium states like Utah(11.2%) and Alaska (12%). Overall, NCCI's advisory loss costs areflat, he said. Meanwhile, far-reaching reforms enacted inCalifornia and some other states that have independent bureaus areactually helping to bring advisory loss costs down nationwide. “Theaggregate would probably show there is a 4% to 5% overall decreasein rating-bureau loss costs,” he said.

Not that problems don't remain for insurers, Burton said.Medical costs continue to grow at a fast past, he said,particularly those associated with prescriptions for the painkillerOxyContin and other pharmaceuticals. According to an NCCI reportissued in October, they accounted for 12.1% of workers comp medicalcosts in 2002, up from 10.1% in 1997.

Workers comp insurers also face uncertainty in the year aheadbecause of the unresolved status of the federal Terrorism RiskInsurance Act. The act is set to expire at the end of the year. Ifit is not extended, policies carriers are writing right now will beexposed to claims after Dec. 31-with no federal backstop to capinsurers' losses. Consequently NCCI has filed an endorsement (WC 0001 12) that carriers can attach to policies taking effect thismonth. The endorsement, filed in all states that NCCI serves,notifies insureds that their premiums “may continue or change fornew, renewal and inforce policies in effect on or after December31, 2005, in the event of TRIA's expiration, subject to regulatoryreview in accordance with applicable state law.” If TRIA is notextended, Burton added, NCCI likely will have to re-file itsterrorism risk insurance endorsement (WC 00 04 20), since thecoverage in it is referenced to the act.

This year, NCCI will re-evaluate its foreign-terrorism loadingto reflect what it would be if TRIA is allowed to expire, Burtonsaid. The current loading, which NCCI obtained shortly after TRIAwas enacted, averaged roughly 2% of payroll for the voluntarymarket and an additional point for the assigned-risk market.

Last year NCCI also calculated a combined load for severalcatastrophic exposures, including domestic terrorism, earthquakes,tsunamis and hurricanes. The load, which varies from state to statebut averages about 1% of payroll, was filed in all NCCI states and,as of last month, had been approved by 25 of them, Burton said.

While noting reforms that some states have enacted in 2004,Burton said work remains to be done in 2005. Two “hot spots,” hesaid, are Oklahoma and Texas. Increasing medical costs are aproblem in both states, Burton said, with chiropractic costs aparticular concern in the Lone Star State. In Oklahoma, he said,there seems to be excessive attorney involvement in the system.There is also talk in Texas of reorganizing the administration ofthe workers comp system and placing it under the state insurancedepartment to improve effi- ciency. (Another state causing concernfor some carriers is New York, which is not among those for whichISO files advisory loss costs. There, the New York CompensationInsurance Rating Board did not get any part of a 23.9% increase inmanual rates that it requested last May. The board subsequentlyfiled an amended request for a 9.5% increase, which as this waswritten was still pending before the New York State InsuranceDepartment.)

The workers compensation residual market has continued to grow.An NCCI report issued last spring estimated the 2003 volume in theassigned-risk plans NCCI administers to be $1.4 billion, up from$1.1 billion in 2002. At this point, the business placed in thepools amounts to about 12% of the total, the report said. But whilethe residual market's share of workers compensation premiums is nowthe highest it has been since 1995, the pace of growth has slowedsubstantially, the report noted, and is still nowhere near the 23%peak, which was hit in 1993.

Burton said there are a number of factors behind the growth ofthe assigned-risk plans, including concerns about terrorism and thefact that underwriters continue to analyze employers' financialcondition conservatively, given workers comp's est- imated 2003calendar-year combined ratio of 108-easily the highest of any majorline of insurance.

The Hartford Financial Services Group

Workers compensation reforms enacted in some states,particularly California, could lead to an increase in capacity,according to Joe Treacy, assistant vice president for workerscompensation product management at The Hartford.

“We're cautiously optimistic,” Treacy said, adding that wherereforms have been approved, “we're looking to write additionalclasses of business that in years past we wouldn't have written.”On the other hand, in states like North Carolina and Massachusetts,where he said rate inadequacy and high costs have led to growingresidual markets, capacity may well shrink.

In California the passage last April of Senate Bill 899, inconjunction with previously enacted reforms, allows insurers andemployers, starting this month, to establish “medical providernetworks” that injured employees will be required to use. TheHartford has already filed to have its networks certified, Treacysaid, adding that this section of SB 899 should have a majorbeneficial effect on the California workers comp system byincreasing the effectiveness of treatment provided to injuredworkers while lowering cost to insurers and employers.

“If you have a doctor who's familiar with occupational medicine,and he or she treats workers compensation claims on a regularbasis, the outcome will be significantly better in terms of gettinga worker healthy and back to work-better than (with) a generalpractitioner who may see one work-related injury a year,” hesaid.

Another section of SB 899 calls for the American MedicalAssociation's Guide to the Evaluation of Permanent Impairment to beused in a new rating schedule that was to have been issued by Jan.1. Treacy said guidelines issued by the American College ofOccupational and Environmental Medicine also were underconsideration, which he called “objective, rational guidelines formedical treatment and utilization.”

Treacy noted that various provisions of SB 899 have beenchallenged in the courts. “It's going to be interesting, given thepush and pull between the applicants' attorneys and the Division ofWorkers Compensation and all other stakeholders out there, (to see)where it ends up,” he said.

Treacy called the extension of TRIA vital, adding that inconversations with congressional staffers, he has been stressingits importance to a healthy workers compensation market. Workerscompensation is a unique line of insurance, he said, in that therecan be no exclusions. “You either write business (in a givenjurisdiction), or you don't,” he said.

“Also, workers compensation provides unlimited medical,” hesaid. “So if somebody is badly burned, or as with the World TradeCenter, there are stress claims, inhalation claims, etc., theinsurers are going to be paying for them long-term.”

Treacy said it is unclear just when Congress will take up theextension of TRIA. He noted that the U.S. Treasury Department isscheduled to issue a report on the legislation later this year. IfCongress waits until then to act, he said, companies will haveissued policies that will remain in force well into 2006. “Thatputs insurers in a difficult position,” he said.

American International Group

When Richard Thomas, senior vice president and chiefunderwriting officer of AIG's domestic brokerage group, looks atthe workers compensation market, he said he sees a stable line ofinsurance in most states, unaffected by any softening in commercialproperty, D&O or other lines. AIG is the nation's largestwriter of workers compensation insurance and is active in allsegments of the market.

“Workers compensation moves to its own pricing rhythm,” Thomassaid.

One thing that could alter the stability, he said, at least incertain markets, would be the expiration of the Terrorism RiskInsurance Act. Thomas said that perhaps 85% of employers would beunaffected, should TRIA come to an end. “However employers who havelarge concentrations of people in major metropolitan areas andother target locations may see a substantial contraction ofcapacity,” he said. “We're forecasting that we would see marketconditions for workers compensation insurance similar to what wesaw after 9/11 and before TRIA was enacted.”

Thomas said he takes no comfort from NCCI's WC 00 01 12endorsement, whose practical purpose, he said, is only to enableinsurers to notify insureds of the status of TRIA, as carrierslegally are obligated to do. While the endorsement informs insuredsthat the termination of TRIA could lead to a change in theirpremiums, subject to regulatory review, Thomas said, “That's likesaying if you put a match to paper, it will probably burn.” Thereality, he said, is that rates won't increase without regulatoryapproval, which will not be easily obtained.

“If TRIA is not extended, or if there is a lengthy delay beforeCongress decides whether or not to extend TRIA, we will manage ourconcentrations of risk very carefully,” Thomas said. “If we reachour capacity limits in certain locations, then we won't write anyadditional business.”

The uncertainty surrounding TRIA aside, Thomas said AIG has afavorable outlook on the workers compensation insurance market.“The general health of the workers compensation system on astate-by-state basis is pretty good, with only a few exceptions,”he said, adding that AIG expects to grow where conditions lookpromising.

Thomas said the reforms enacted last year in California underSenate Bill 899 were a positive step, but that it remains to beseen how the law's provisions will be translated intoadministrative action that will “define what the legislationactually means.” At this point, Thomas said, “It's impossible toknow what the outcome is going to be. We're taking California dayby day and are prepared to adjust our pricing in the market as wesee information come out.”

Thomas said Texas is another state in which regulatory reformseems to be moving in the right direction. New York and New Jersey,he added, are among states that remain problematic.

PMC Insurance Group

One sign that the workers compensation market may be getting alittle more competitive is the greater interest shown in it bypackage-program insurers, according to Greg Malloy, chairman andCEO of PMC Insurance Group, in Needham, Mass. PMC is a wholesalerthat sells monoline workers compensation insurance exclusively. Itoperates on a nationwide basis, with the largest percentage of itsbusiness coming from New England and New York, the rest of the EastCoast and the central Midwestern states. Since July, Malloy said,he's noticed that several carriers, both national and regional,active in the market for small, low-hazard accounts have begun tooffer workers comp, along with their BOPs and other packageproducts for such risks. “That's a big change,” he added.

In regard to recent state regulatory actions, Malloy said theyso far appear to be a mixed bag. “New Jersey has been a difficultstate for us,” he said, “but we're seeing a rate increase there,and we may see a positive effect from that.” A few markets arestarting to indicate some interest in writing business in the stateon a limited basis, he added.

Florida, Malloy notes, has enacted some reforms which could helphold down medical and indemnity costs, but he said the state isalso decreasing rates by about 5% starting this month andincreasing weekly wage benefits by 4%. For insurers, “it's tough toget ahead,” he said.

Despite the passage of SB 899 in California, Malloy said he hadyet to see a significant change in regard to his operations there.Partly, this is because workers compensation insurers tend to allotmore capacity to agents in the Golden State than to wholesalersfrom outside it, he said. But he added that his insurers, despitethe reforms, are still a little more conservative in their pricingthan are the State Compensation Insurance Fund of California and acouple of other markets in the state.

“The markets that we do business with are not totally convincedthat they ought to be going in full bore,” Malloy said. Onepossible reason, he said, is that after allowing rate increases forseveral years to keep up with rapidly rising comp costs, Californiaregulators decreased rates in several steps during 2004 by a totalof about 23%. So despite significant reforms in California, Malloysaid his insurers seem to be taking a “wait-and-see” attitude.

Malloy said TRIA's uncertain status also is a big concern to hisinsurers. But with a Republican administration re-elected and withRepublicans firmly in control of Congress, he said his insurersseemed cautiously optimistic that TRIA will be extended.

In the year ahead, Malloy said his agency plans to beginoffering workers compensation insurance on a payroll-deductionbasis. Whereas PMC currently can offer workers comp to a typicalclient for 20% down and nine equal installments, payroll deductionwould make it possible for clients to make minimal down paymentsand then pay installments according to whatever payroll schedulethey're on.

For the system to work, insureds would have to work with anapproved independent payroll-processing company, which Malloy saidmost already do. The payroll company automatically deducts theinsured's premium, which is proportionate to the insured's payrollfor the period, and forwards it to the insurer. Such an approachsmoothes out payments and eliminates premium audits, Malloy noted,and is particularly beneficial to seasonal businesses, which do nothave to come up with large workers comp premium payments at a timethey are relatively inactive.

Many businesses have their worker comp insurance handled in thismanner when they contract with professional employmentorganizations, Malloy noted. “We'll be able to offer the samebenefit without an insured having to go into a PEO,” he said.

The Princeton Agency Inc.

The year ahead for workers compensation appears to be relativelyuneventful, according to David Springer, vice president of ThePrinceton Agency in Princeton, N.J. The Princeton Agency is part ofthe AmTrust organization, which also owns the Rochdale andTechnology Insurance Companies.

“I see rates moderately increasing still, but not nearly at thepace that they did a couple of years ago,” he said. “Availabilityis tightening a little bit as well, especially in thesmaller-premium market. We're seeing (insurers) come in withminimum premiums of $5,000 to $10,000, where before they'd writedown to $2,000.”

The Princeton Agency, which writes workers compensationinsurance exclusively, primarily focuses on that small-businessmarket, Springer said. Typical risks include retail stores,restaurants, professional offices, doctors and hotels. The MGAmainly writes in New York, New Jersey, Pennsylvania and Illinois,but also does business throughout the East Coast and in selectedstates as far west as Arizona. Their clients pay as much as$100,000 for coverage, but the average is $2,500 to $5,000, hesaid.

The higher minimums in the small-business market probably don'treflect a lack of capacity so much as insurers' determination tomake a reasonable profit. “To write the smaller premiums, you haveto be remarkably efficient,” Springer said. “So what we're seeingis that people are less likely to write the smaller risks, unlessthey are part of a package.” The trend is not particularlyaffecting The Princeton Agency, however, which has minimum premiumsas low as $350 or $500, depending on the state.

Springer said he believes the re-election of President George W.Bush will increase the odds for favorable tax policy, which shouldhelp small businesses and hence his MGA. He said The PrincetonAgency plans to add some new class codes in 2005, for artisancontractors in certain states and for restaurants and tavernsacross the board. In certain states, he said, “We're looking toactually reduce some of our rates or deviate down, so we're moreattractive.”

In regard to underwriting, Springer said The Princeton Agencywill look closely at the description of risk. “That's somethingthat traditionally has been a one or two-word answer on anapplication,” he said. “What we're doing now from an underwritingperspective is really trying to understand the risks-so we canwrite more good risks, not so we can decline them.”