Some large businesses that are facing layoffs or work order slowdowns are asking commercial insurers to reduce their workers compensation premiums during the policy term, brokers say.

A few have succeeded in doing so, while others have found more success in reducing the minimum premium they are contractually obligated to pay at the end of their policy period.

Still other insureds that have seen declining work orders and a coinciding decline in exposures are asking for midterm policy reviews of the collateral posted for large-deductible workers comp programs, the brokers say.

"It's not normally how business is done," and insurance purchasers and their brokers should carefully evaluate their business outlook for the coming year to "right-size" premium and collateral agreements at renewal time, said Pam Ferrandino, executive vp and casualty practice leader for Willis HRH in New York.

But because of economic conditions, Willis has helped about 10 clients with large-deductible programs negotiate premium reductions before their policy term is completed, Ms. Ferrandino said. Policyholders wanted to do so because work "backlogs dissipated, or contracts have fallen through and the client expected to have a certain business profile for the year and something changed," Ms. Ferrandino said.

Usually, premium payments made throughout the year are negotiated as part of the renewal based on an estimate of the buyer's expected year-end payroll, among other factors.

But the workers comp premium policyholders actually pay is determined ultimately by the size of their payroll, among other factors, at the end of their policy period. They may have to pay more if their estimate of year-end payroll was low or insurers may have to refund some of the premium if the buyer's payroll estimate was too high or if unanticipated employee reductions took place during the policy period.

Buyers' success in reducing their premiums during the policy period has depended on whether the original pricing for their program left room for insurers to reduce it, as well as insurers' desire to retain that particular client, said Tony Tam, New York-based managing director of Marsh Inc.'s U.S. casualty practice.

"We have seen clients come back and say, 'I have shut down two of my plants and, therefore, (I have) a sizable decrease in costs. How can I get this (premium) back?"' Mr. Tam said. "Some clients have been successful. Some clients have not, because it depends on how their program is structured."

In a few cases, insurers have agreed to cancel a contract and rewrite the entire program for the next 12 months. "Those are rare, but we have seen it happen," Mr. Tam said.

Insurers are not obligated to reduce premiums during the policy term and are very reluctant to do so, several brokers agreed. Doing so puts an insurer's capital at greater risk.

Insurers may argue that their exposure to fraudulent claims might rise because of layoffs at the client's facilities, brokers said. Insurers also may be constricted by other considerations, such as state-mandated minimum rates, Ms. Ferrandino said.

Additionally, workers comp insurers are facing their own challenges, such as an overall decline in premium because of issues such as declining injury frequency, rate reductions and shrinking payrolls, sources said.

Net written premiums for workers comp have declined 2.5% since 2006 and stood at roughly $44 billion for 2007, according to data from Boca Raton, Fla.-based NCCI Holdings Inc.

While 2008 data on workers comp insurer premium volume is not yet available, Bruce R. Hockman, executive vp of reinsurance practice in Philadelphia for Towers Perrin, said it's possible 2008 will register a 7% decline in premium volume and the decline will be that much or more for 2009.

Some clients who have not succeeded in convincing insurers to reduce their premium during the policy have found insurers more flexible about reducing the contractual minimum amount paid at year-end regardless of the final payroll audit results, several sources said.

To help account for layoffs, Bill McMahon, risk manager for Riverside, Calif.-based Fleetwood Enterprises Inc., said he has negotiated for a 75% minimum premium rather than a typical 90% minimum premium.

"We tried for 65% and were not successful in doing that," Mr. McMahon said.

As an alternative to reducing premium payments during the policy period, Mr. McMahon suggested buyers might try to convince insurers to extend their policy period at no additional cost.

His insurer has signaled the possibility of extending his coverage under a products liability policy for six months, rather than cancel the policy and return the premium, because of Fleetwood's significant reduction in exposure tied to declining sales evidenced by a bankruptcy reorganization filing by the recreational vehicle and manufactured home maker, Mr. McMahon said.

Citing decreasing exposure levels, some policyholders have succeeded in reducing the collateral they must post with workers comp insurers to assure claims falling within a large deductible will be paid, brokers said.

Other insurance purchasers have inquired about reducing their collateral, but have not been able to do so, said Len Churnetski, chief operating officer in New York for the national casualty practice of Aon Corp.

"That is a real sensitive issue" for insurers, who insist on negotiating collateral amounts no more than once a year, Mr. Churnetski said. Doing so requires insurers to incur costs, such as conducting actuarial studies or collecting claims data from third-party administrators.

But insurers are increasingly empathetic to the financial challenges buyers face in today's economic environment, Ms. Ferrandino said.

Several insurers, however, declined to discuss their premium strategies.

Increasingly, underwriters are spending more time with their buyers to set appropriate premium and collateral levels amid exposure levels that are declining because of a weak economy, said Ken Riegler, executive vp and chief operating officer in New York for ACE Risk Management, a unit of ACE USA.