At the National Council on Compensation Insurance's (NCCI) 2010 Annual Issues Symposium, NCCI CEO Steve Klingel reported that deteriorating underwriting results, combined with a record low interest rate environment, uncertainty about the economic recovery, and the long term impact of the new federal health-care law put the workers' compensation insurance industry in a precarious position. All of these concerns rightly shine a spotlight on the workers' compensation residual markets. Fortunately, these markets have operated well in recent years.
One of NCCI's core functions is to act as the administrator of the state workers' compensation residual market insurance plans and the reinsurance pools. The plans are the basic instrument through which eligible employers who would otherwise be unable to obtain necessary insurance coverage can secure workers' compensation insurance. The plans include the state-approved rules that govern the assignment, administration, eligibility and policy issuance requirements. NCCI administers plans on behalf of insurance regulatory authorities in 21 jurisdictions.
While the plans provide the mechanism to distribute employers equitably among participating insurance carriers, the pools are a series of financial reinsurance agreements among workers' compensation insurance companies to share in the operating results of the state insurance plans. The largest of these pooling arrangements is the National Workers' Compensation Reinsurance pooling mechanism.
2009 Residual Market Results
In 2009, NCCI saw a continuation of workers' compensation insurance residual market conditions that have existed for the last four years. The latest available results show declining residual markets and manageable operating losses, which are key indicators of sound workers' compensation systems. These results were consistent among all states managed by NCCI.
NCCI bound coverage on 136,000 new residual market accounts in 2009. This represents a decline of 20 percent in the number of new residual market applications versus 2008, and the amount of assigned premium declined by 17 percent during the same period. We believe that these declines were driven by several factors, including:
- The slowdown in the U.S. economy
- Stable and competitive state workers' compensation systems
- Various NCCI residual market depopulation programs (including Residual Market Expiration Lists, Take-Out Credits, and the Voluntary Coverage Assistance Program [VCAP(R) Service]) that operate effectively in all states where they are approved
Further, NCCI recognizes the need to provide depopulation programs to assist policyholders in finding coverage in the voluntary market. A significant number of exclusive, proprietary, and automated online programs have been developed that encourage the depopulation of the residual market. NCCI's proprietary VCAP Service, a free Internet-based depopulation program which provides an additional source for producers and employers to secure workers' compensation in the voluntary market, has redirected over 110,000 policies and $69 million in premium at an average premium savings of 18.6 percent countrywide.
The 2009 residual market written premium for all pools serviced by NCCI estimated as of Dec. 31, 2009, is $511 million, which is one third of the most recent high mark of $1.5 billion in 2004. The 2009 combined ratio is estimated at 115 percent, which is 10 points higher than it was in 2006. Operating losses are estimated at $75 million for the same period, and the residual market share is now under four percent.
Market Share Factors
National and state residual market shares are affected by many factors and can fluctuate over time. Factors such as competitive insurance markets, rate adequacy, stable workers' compensation systems, and the existence of competitive state funds can all have an impact. The states with the highest residual market shares are New Hampshire, Kansas and Alaska. The lowest residual market shares are in Idaho, Arizona and West Virginia.
The most important factor in managing workers' compensation residual markets is to work toward self-funded plans in all states. Self-funded residual markets have proven to be one of the key factors in maintaining sound and competitive state workers' compensation systems.
Due to the combination of adequate residual market rates, approved rating plans and effective depopulation programs, residual market operating results have been stable over the last ten years.
In fact, most states have achieved self-funded residual markets and only a few states generated a significant 2009 operating deficit. However, with a continued focus on overall rate adequacy, operational efficiency, and self-funded residual markets, we can all hope for more stability in the future, even in the face of the precarious industry conditions.
Jim Nau, CPCU, ARM, WCP, is the general manager residual markets at NCCI, Inc., where he is responsible for the administration of the workers' compensation residual market reinsurance pools and assigned risk plans approved in NCCI states. (jim_nau@ncci.com).
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