WC On The Rebound, But Threats Loom

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Calif. reforms offer relief, but concerns remain over soaringmedical costs, terrorism

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Insurance professionals surveying the current workers'compensation marketplace are encouraged by California reforms butconcerned about terrorism, hurricane effects and soaring medicalcosts.

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In addition, despite the push in many states to reform and makeworkers' comp systems more cost efficient, there are two that haveserious problems--South Carolina and New York--these observerscontend.

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Prices for workers' comp have generally not shown the declinesof other lines. Indeed, the most recent Risk and InsuranceManagement Society Benchmark Survey, produced by New York-basedAdvisen Ltd., found workers' comp premiums down by only 3.75percent before Hurricane Katrina.

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At American International Group in New York, the nation'slargest workers' comp insurer, Dick Thomas, senior vice presidentand chief underwriting officer in the domestic brokerage group,said he expects to see "a continuing degree of conservatism inpricing workers' comp."

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Joe Treacy, assistant vice president for The Hartford, thenation's fifth-largest workers' comp writer, said at this point,"overall the landscape for most carriers is pretty good" despiteconcerns about rising medical costs.

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He noted that in states reporting to the National Council onCompensation Insurance, rates have gone down 4-to-5 percent at thesame time that medical costs have increased 10.5 percent.

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In California--the nation's most populous state--insurers' purepremium rate decreases have totaled 26.7 percent since 2003 reformlegislation was approved, according to state officials.

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However, with applicants' attorneys challenging many points ofthe new law, Mr. Treacy said there remains some uncertainty,although "we're cautiously optimistic."

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Ed Lynch, the global practice leader for workers' comp at Marshin New York, said California reforms had a favorable impact onpricing, adding that the brokerage has seen dividend plans beingoffered to entice guaranteed-cost buyers.

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Both he and Mr. Treacy said the California market is highlycompetitive following reform.

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However, if Congress fails to renew its federal backstop forterrorism insurance in the Terrorism Risk Insurance Act, whichexpires Dec. 31, "you will see availability problems" for workers'comp insurance, warned Mr. Treacy.

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"We have to re-evaluate everything if January comes aboutwithout TRIA in some form," said Paul Ramont, vice president forworkers' comp underwriting at St. Paul Travelers, the country'sthird-biggest writer.

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AIG's Mr. Thomas said his firm since February had been carefullymonitoring worker aggregate accumulations on a "target by target"basis, and has been capping its exposures.

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Mr. Lynch said getting coverage for sites with largeconcentrations of workers had definitely become more complicatedfor businesses. A year ago, he noted, insurers looked carefully atwork populations over 300. Now he finds they are scrutinizing eventhose locations with fewer than 100 workers, although it does varybased on location.

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Mr. Ramont said the reforms that have taken place in Texas andCalifornia to limit costs have tended to obscure the problem ofmedical inflation and make the situation appear more stable than itis.

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The medical cost increases, he said, are more a result ofover-treatment involving items such as chiropractic visits andsurgery. Carriers, Mr. Ramont noted, are watching closely theeffect of California's use of American College of Occupational andEnvironmental Medicine guidelines to treat and evaluateinjuries.

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Mark Noonan, the practice leader for workers' comp at Marsh,said that the rising severity and medical cost of injuries is whatis driving states to pass reform measures.

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Among most of those interviewed, two states--South Carolina andNew York--appeared on the radar as workers' comp trouble spots. Mr.Ramont said costs in South Carolina had "exploded," and while thestate is looking for a remedy, it has so far not adopted any of themechanisms that might help.

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There are strains as well in the New York workers' comp market,he said, where the recommendation for rate increases from the staterating board have been largely ignored by regulators. AIG's Mr.Thomas said rates in New York and South Carolina "need to beincreased by double digits."

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In general, those interviewed said there have been no particularshifts in pricing for different occupations, with job categorieswith the higher injury rates continuing to involve costliercoverage.

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However, Mr. Thomas said he has noticed that among largeconstruction firms, there has been a significant safety emphasisbecause the big firms have learned that the amount they save inworkers' comp insurance based on their loss experience "can meanhow much margin they can make on the job."

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Mr. Treacy mentioned that because of rising medical costs, evena small injury becomes very expensive. He said among the categorieswhere The Hartford has an "expanding appetite" for workers' compbusiness is in the area of technology and financial services. Forthat sector, "it's a very competitive marketplace," he advised.

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However, that's not the case in the view of Mr. Thomas at AIG,who said he had not seen "any change out in the marketplacesuggesting certain classes are hotter."

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None of those interviewed would guess what, if any, spilloverthere might be on the workers' comp market as the result of recenthurricane losses.

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Other unanswered storm-related questions that were mentionedinclude the possibility of health claims by contractors whoseworkers are exposed to dangerous mixes of debris and pollution, andworkers returning to so-called "sick buildings."

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There is also the question of what sort of coverage might beavailable for volunteers who have arrived to help in storm-strickenareas.

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"Are they covered? We've got a lot of questions," said Marsh'sMr. Lynch. "The answer is it varies state by state, and in generalyour home state [regulation] covers."

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Caption for crazy doctor picture:

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Carriers fear the market could be undermined by soaring medicalcare costs, potentially making even small injuries veryexpensive.

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Infographic for page S-2: with small pix of crazy doctor

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Flag: Trouble Spots

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Head: What Keeps WC Carriers Up At Night?

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The following problems are of continuing concern to workers'comp carriers, fearful of the impact on their bottom lines.

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o Doctor Woes: Over-treatment involvingchiropractic visits and surgery are sending medical care costssoaring.

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o Drugs: Prescriptions are skyrocketing,sending claim costs through the roof.

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o Terrorism: If Washington fails to renew TRIA,carriers warn of availability and affordability problems.

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o Sorry States: At least two states--SouthCarolina and New York--are cited as major trouble spots in workers'comp.

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o Storm Aftermath: Questions remain aboutworkers' comp claims following the hurricanes--both for those whomay have lost their jobs for good, as well as volunteers, cleanupand reconstruction workers in the impacted areas.

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