IN 2004, the workers compensation system appeared to build on its rebound from the depths the market reached between 1999 and 2002. While no figures for the year are yet available, anecdotal evidence suggests that the trends that were evident in 2003- climbing premium volume, lowering loss ratios and a better return on investment-had a good chance of continuing. The outlook is tempered, however, by such factors as medical inflation, lack of progress toward reforms in some states and above all by the uncertain future of the federal Terrorism Risk Insurance Act.

To obtain some perspective on what agents and brokers can expect in the year ahead, I recently contacted the National Council on Compensation Insurance, as well as two insurers and two MGAs active in 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, sounded relatively upbeat. Reforms have been approved in a number of states, he noted, insurers' loss reserves are improving, and the frequency 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 carriers continue to underwrite conservatively.

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

Loss costs actually have improved more than those numbers might indicate, Burton said. In Florida, rates are decreasing by 5.1% by order of the insurance commissioner, and in Illinois NCCI has filed for an increase of just one-tenth of 1%. Burton said the filings in those two states, the largest for which NCCI makes filings, more than offset the increases sought in small-premium states like Utah (11.2%) and Alaska (12%). Overall, NCCI's advisory loss costs are flat, he said. Meanwhile, far-reaching reforms enacted in California and some other states that have independent bureaus are actually helping to bring advisory loss costs down nationwide. “The aggregate would probably show there is a 4% to 5% overall decrease in 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 painkiller OxyContin and other pharmaceuticals. According to an NCCI report issued in October, they accounted for 12.1% of workers comp medical costs in 2002, up from 10.1% in 1997.

Workers comp insurers also face uncertainty in the year ahead because of the unresolved status of the federal Terrorism Risk Insurance Act. The act is set to expire at the end of the year. If it is not extended, policies carriers are writing right now will be exposed to claims after Dec. 31-with no federal backstop to cap insurers' losses. Consequently NCCI has filed an endorsement (WC 00 01 12) that carriers can attach to policies taking effect this month. The endorsement, filed in all states that NCCI serves, notifies insureds that their premiums “may continue or change for new, renewal and inforce policies in effect on or after December 31, 2005, in the event of TRIA's expiration, subject to regulatory review in accordance with applicable state law.” If TRIA is not extended, Burton added, NCCI likely will have to re-file its terrorism risk insurance endorsement (WC 00 04 20), since the coverage in it is referenced to the act.

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

Last year NCCI also calculated a combined load for several catastrophic exposures, including domestic terrorism, earthquakes, tsunamis and hurricanes. The load, which varies from state to state but 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,” he said, are Oklahoma and Texas. Increasing medical costs are a problem in both states, Burton said, with chiropractic costs a particular 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 of the workers comp system and placing it under the state insurance department to improve effi- ciency. (Another state causing concern for some carriers is New York, which is not among those for which ISO files advisory loss costs. There, the New York Compensation Insurance Rating Board did not get any part of a 23.9% increase in manual rates that it requested last May. The board subsequently filed an amended request for a 9.5% increase, which as this was written was still pending before the New York State Insurance Department.)

The workers compensation residual market has continued to grow. An NCCI report issued last spring estimated the 2003 volume in the assigned-risk plans NCCI administers to be $1.4 billion, up from $1.1 billion in 2002. At this point, the business placed in the pools amounts to about 12% of the total, the report said. But while the residual market's share of workers compensation premiums is now the highest it has been since 1995, the pace of growth has slowed substantially, 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 of the assigned-risk plans, including concerns about terrorism and the fact that underwriters continue to analyze employers' financial condition conservatively, given workers comp's est- imated 2003 calendar-year combined ratio of 108-easily the highest of any major line 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 workers compensation product management at The Hartford.

“We're cautiously optimistic,” Treacy said, adding that where reforms have been approved, “we're looking to write additional classes 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 growing residual markets, capacity may well shrink.

In California the passage last April of Senate Bill 899, in conjunction with previously enacted reforms, allows insurers and employers, starting this month, to establish “medical provider networks” that injured employees will be required to use. The Hartford has already filed to have its networks certified, Treacy said, adding that this section of SB 899 should have a major beneficial effect on the California workers comp system by increasing the effectiveness of treatment provided to injured workers 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 regular basis, the outcome will be significantly better in terms of getting a worker healthy and back to work-better than (with) a general practitioner who may see one work-related injury a year,” he said.

Another section of SB 899 calls for the American Medical Association's Guide to the Evaluation of Permanent Impairment to be used in a new rating schedule that was to have been issued by Jan. 1. Treacy said guidelines issued by the American College of Occupational and Environmental Medicine also were under consideration, which he called “objective, rational guidelines for medical treatment and utilization.”

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

Treacy called the extension of TRIA vital, adding that in conversations with congressional staffers, he has been stressing its importance to a healthy workers compensation market. Workers compensation is a unique line of insurance, he said, in that there can be no exclusions. “You either write business (in a given jurisdiction), or you don't,” he said.

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

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

American International Group

When Richard Thomas, senior vice president and chief underwriting officer of AIG's domestic brokerage group, looks at the workers compensation market, he said he sees a stable line of insurance in most states, unaffected by any softening in commercial property, D&O or other lines. AIG is the nation's largest writer of workers compensation insurance and is active in all segments of the market.

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

One thing that could alter the stability, he said, at least in certain markets, would be the expiration of the Terrorism Risk Insurance Act. Thomas said that perhaps 85% of employers would be unaffected, should TRIA come to an end. “However employers who have large concentrations of people in major metropolitan areas and other target locations may see a substantial contraction of capacity,” he said. “We're forecasting that we would see market conditions for workers compensation insurance similar to what we saw after 9/11 and before TRIA was enacted.”

Thomas said he takes no comfort from NCCI's WC 00 01 12 endorsement, whose practical purpose, he said, is only to enable insurers to notify insureds of the status of TRIA, as carriers legally are obligated to do. While the endorsement informs insureds that the termination of TRIA could lead to a change in their premiums, subject to regulatory review, Thomas said, “That's like saying if you put a match to paper, it will probably burn.” The reality, he said, is that rates won't increase without regulatory approval, which will not be easily obtained.

“If TRIA is not extended, or if there is a lengthy delay before Congress decides whether or not to extend TRIA, we will manage our concentrations of risk very carefully,” Thomas said. “If we reach our capacity limits in certain locations, then we won't write any additional business.”

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

Thomas said the reforms enacted last year in California under Senate Bill 899 were a positive step, but that it remains to be seen how the law's provisions will be translated into administrative action that will “define what the legislation actually means.” At this point, Thomas said, “It's impossible to know what the outcome is going to be. We're taking California day by day and are prepared to adjust our pricing in the market as we see information come out.”

Thomas said Texas is another state in which regulatory reform seems 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 a little more competitive is the greater interest shown in it by package-program insurers, according to Greg Malloy, chairman and CEO of PMC Insurance Group, in Needham, Mass. PMC is a wholesaler that sells monoline workers compensation insurance exclusively. It operates on a nationwide basis, with the largest percentage of its business coming from New England and New York, the rest of the East Coast 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 to offer workers comp, along with their BOPs and other package products for such risks. “That's a big change,” he added.

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

Florida, Malloy notes, has enacted some reforms which could help hold down medical and indemnity costs, but he said the state is also decreasing rates by about 5% starting this month and increasing weekly wage benefits by 4%. For insurers, “it's tough to get ahead,” he said.

Despite the passage of SB 899 in California, Malloy said he had yet to see a significant change in regard to his operations there. Partly, this is because workers compensation insurers tend to allot more capacity to agents in the Golden State than to wholesalers from outside it, he said. But he added that his insurers, despite the reforms, are still a little more conservative in their pricing than are the State Compensation Insurance Fund of California and a couple of other markets in the state.

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

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

In the year ahead, Malloy said his agency plans to begin offering workers compensation insurance on a payroll-deduction basis. Whereas PMC currently can offer workers comp to a typical client for 20% down and nine equal installments, payroll deduction would make it possible for clients to make minimal down payments and then pay installments according to whatever payroll schedule they're on.

For the system to work, insureds would have to work with an approved independent payroll-processing company, which Malloy said most already do. The payroll company automatically deducts the insured's premium, which is proportionate to the insured's payroll for the period, and forwards it to the insurer. Such an approach smoothes out payments and eliminates premium audits, Malloy noted, and is particularly beneficial to seasonal businesses, which do not have to come up with large workers comp premium payments at a time they are relatively inactive.

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

The Princeton Agency Inc.

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

“I see rates moderately increasing still, but not nearly at the pace that they did a couple of years ago,” he said. “Availability is tightening a little bit as well, especially in the smaller-premium market. We're seeing (insurers) come in with minimum premiums of $5,000 to $10,000, where before they'd write down to $2,000.”

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

The higher minimums in the small-business market probably don't reflect a lack of capacity so much as insurers' determination to make a reasonable profit. “To write the smaller premiums, you have to be remarkably efficient,” Springer said. “So what we're seeing is that people are less likely to write the smaller risks, unless they are part of a package.” The trend is not particularly affecting The Princeton Agency, however, which has minimum premiums as 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 should help small businesses and hence his MGA. He said The Princeton Agency plans to add some new class codes in 2005, for artisan contractors in certain states and for restaurants and taverns across the board. In certain states, he said, “We're looking to actually reduce some of our rates or deviate down, so we're more attractive.”

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

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