Comp Carve-Out Business Still Hurting Life Sector

Comp Carve-Out Business Still Hurting Life Sector

By Michale Ha

NU Online News Service, Oct. 13, 4:05 p.m. EDT?It's been six years since the U.S. life insurance industry began learning about disastrous outcomes of its participation in the workers' compensation carve-out business, but the industry is still plagued by exposures in this arena, a ratings analyst observed.[@@]

"The U.S. life insurance industry continues to have ongoing exposures to the workers' comp carve-out business?a business that the industry effectively exited approximately six years ago. But it's a long-tail line of business," said Douglas Pawlowski, an insurance analyst for New York-based Fitch Ratings, during an industry conference call.

Workers' comp carve-out business refers to reinsurance assumed by life and health insurers for medical, wage-loss and death benefits from occupational illnesses and accident exposures?but it doesn't include employers' liability exposures of business originally written as workers' comp insurance.

Until roughly six years ago, life insurers wrote workers' comp carve-out business mostly by participating with other life insurers in various pooling arrangements or retrocession facilities, organized and managed by managing general underwriters.

These pools reinsured accident and health components of workers' comp insurance under various risk arrangements that ranged from traditional catastrophic protection with high attachment points to low-level whole-account quota-share arrangements.

The most-publicized case of life insurers entering workers' comp carve-out business involved a pool and two facilities managed by Unicover Managers Inc., a South Plainfield, N.J.-based group which had arranged for a combine of life insurers to take on huge amounts of reinsurance from primary workers' comp insurers. Analysts calculate that some $2 billion in losses were generated by businesses connected with Unicover.

Mr. Pawlowski noted that disputes that developed over the Unicover treaties and similar workers' comp carve-outs have been taking very long to settle. "The dispute resolution with Unicover and other workers' compensation carve-out facilities has been drawn out due to poor documentation and ill-defined agreement and the slow nature of the process," he said.

In many cases, Mr. Pawlowski explained, multiple layers of reinsurance led to a reinsurance spiral?instances where insurers ceded liabilities only to reassume portions of the same risk later on down the reinsurance chain.

On a more positive note, Mr. Pawlowski estimated that more than half of all the arbitration appears to be settled, including decisions regarding Unicover pool participants and two Unicover-managed facilities. He added, however, that arbitration within the many layers of Unicover retrocessionaires as well as non-Unicover workers' comp carve-out business still remains unresolved.

According to Fitch, more expected settlements are increasingly likely over the next 12-to-18 months, but the life insurance industry as a whole is not adequately reserved for this exposure. "Fitch does believe that additional charges are forthcoming," Mr. Pawlowski said.

For the very large life insurers, he predicted, this ongoing exposure would be manageable. Many of the smaller companies, however, could experience "material impairment" in statutory capital base under extreme adverse scenario, Mr. Pawlowski said.