Better Workers’ Comp Underwriting Needed, AMCOMP Members Told

Workers’ compensation executives from across the nation gathered last month for the annual American Society of Workers’ Comp Professionals Inc. (AMCOMP) conference in Las Vegas where members heard the industry taken to task for poor underwriting of workers compensation and given advice on what to expect in years ahead.

William A. Rabl, senior vice president and chief underwriting officer at ACE Risk Management, cited the industry’s poor performance in underwriting workers’ compensation, noting there has not been an underwriting profit since 1978.

In a panel discussion entitled “Successful Underwriting, Proven Strategies that Work,” Rabl said that while the frequency of loss is decreasing, claim severity has gone up, which has a compounding effect on the excess premiums. Additionally, he noted, for the first time in history, the medical portion of claims is now greater than the indemnity, a trend that Rabl expects to continue.

“We’re still in the tail of a hard market from a pricing standpoint but prices are definitely starting to increase at a lower rate,” Rabl said, estimating a 10 percent increase on the compensation side.
Raymond Jacobsen, a workers’ compensation consultant on the panel, urged the industry to pay attention to how frequency and severity have changed and will change in the future.

From 1992 to 2002, there was a prolonged period of declining frequency, according to Jacobsen. “Is that due to macroeconomic issues or is that due to some other issues?” he asked. “What’s going to happen to frequency over the next decade?”

Jacobsen cited changes over the past decade that helped reduce frequency, including fraud mandates, a shift in jobs from manufacturing to services sector, and a stronger emphasis on safety. But, he noted, there are also forces working against lowered frequency.

“Another dynamic that is influencing frequency is an expanding language barrier where people are really just not familiar with what workers’ compensation is or there isn’t a knowledge of how to communicate when somebody has a physical problem,” Jacobsen continued.

The last 10 years of decline in frequency has been a “unique” period, Jacobsen offered, and the industry should not think it will continue. “It can’t go down to zero. It has to level off at some point in time. The question is when is frequency going to level, when is it going to go up, and I think we need to resource ourselves to that inevitable issue.”

Discussion at AMCOMP also focused on the Terrorism Risk Insurance Act of 2002, known as TRIA, which is expected to sunset at the end of 2005 and some observers predict is unlikely to be renewed.

Non-renewal of TRIA would be unfortunate, according to Richard Palczynski, former group senior vice president and chief actuary of Hartford Financial Services Inc., who said TRIA helped stabilized the market. He believes it is critical to continue some similar coverage especially for workers compensation because terrorism coverage cannot be excluded.

“TRIA plays a very significant role today,” he maintained. With TRIA in force, insurers would be wounded by further catastrophes but could still survive. “The entire industry surplus backing up workers’ compensation is about $30 million,” Palczynski added. “A terrorist event with significant probability based on the experts could easily wipe out the entire surplus industry wide and countrywide behind the workers’ compensation line.”

Palczynski urged consideration of a voluntary terrorism pool that would work under a federal backstop, therefore better utilizing the capacity of the industry, likening it to models in other, including Great Britain.

Douglas Dirks, chief executive officer of Employers Insurance Company of Nevada, opened the conference speaking of the increase in mergers and acquisitions in the industry, of which there have been more in 2003 than in 2001 and 2002 combined. “We think that’s very much going to influence the behaviors of the industry and expect there will be much more going forward,” Dirks told the gathering.