Brokers say abundant insurer competition for a shrinking premium volume has pressured prices for workers compensation renewals, but insurers say prices are stabilizing.

Risk managers, brokers and insurers agree on one point: Negotiations over collateral arrangements for large-deductible programs are as important as prices during workers comp renewal discussions.

The ultimate price for 2010 renewal coverage, though, will be determined by whether layoffs have forced policyholders’ payrolls to shrink, price decreases they may have obtained during past renewals, policyholders’ loss history and competition among insurers.

Insurer competition is particularly robust for smaller guaranteed-cost programs with annual premiums of about $250,000 or less, said David Sandler, president of general casualty and chief operating officer in New York for Chartis Inc.’s commercial casualty unit.

“A number of carriers are interested in that business,” Mr. Sandler said.

But pricing is stable for larger “risk management” accounts that share in the risk through large deductibles or other arrangements, Mr. Sandler added. In general, they have seen prices range from 5% decreases to 5% increases, he said.

Other observers say underwriters may try to hold pricing steady, but mainly shrinking payrolls have insurers vying to shore up their gross written premiums.

“It’s a dogfight out there,” said Pam Ferrandino, executive vp and casualty practice leader for Willis HRH in New York.

At the start of negotiations, incumbent insurers generally are seeking a single-digit increase for larger accounts, said Len Churnetski, chief operating officer in New York for the national casualty practice of Aon Corp. But the final price may be flat if the client does not seek competitive bids or their payroll exposure shrinks.

Buyers that seek competitive bids or those with rising payrolls may see rate reductions from insurers that are happy to have accounts with a growing exposure base, Mr. Churnetski said.

Growth in payroll and profit margin, as well as losses kept within a large deductible, helped San Diego-based Cubic Corp. obtain favorable pricing and collateral arrangements for an Oct. 1 renewal for about 7,500 lives, said Dominic Zullo, the defense and transportation contractor’s director of risk management.

He sought bids and found plenty of competition, but Mr. Zullo said he ultimately renewed with incumbent Chicago-based insurer CNA Financial Corp., which provided a rate decrease of about 5% for domestic workers comp and Defense Base Act coverage.

CNA won the renewal, in part, because its Defense Base Act quote was very competitive and even allowed Cubic to arrange a large deductible for that business—something many insurers resist because the coverage requires them to pay workers comp claims for the covered Department of Defense contractors and then seek reimbursement from the government.

Mr. Zullo said CNA also was aggressive in estimating Cubic Corp.’s loss development, which reduced its collateral requirements. He said his practice of aggressively closing claims early helped in the collateral negotiations.

Because of ongoing credit market constriction and the cost of capital, many risk managers are very focused on negotiating collateral levels that insurers require to guarantee the payment of claims within large deductibles, sources said.

Collateral always has been significant in renewal discussions, but customers are looking to free up capital, said Kathy Langner, senior vp and global workers comp practice leader in Whitehouse Station, N.J., for Chubb Group of Insurance Cos.

“Do we get pushed on (collateral discussions)? Of course we do in this economic environment,” Ms. Langner said.

As for renewal pricing, Ms. Langner said she saw rates stabilize during the fourth quarter of 2009.

“Even good risks, depending on what market segment they are in and what their ‘economic environment’ is, can drive pricing down maybe a little bit,” Ms. Langner said. “But if they have been enjoying decreases for the last two years, I think those decreases are bottoming out.”

Observers who see rates bottoming out say it is happening, in part, because insurers still must pay their fixed costs despite shrinking payrolls. So in cases where a buyer’s payroll has decreased, insurers may not be reducing the price by an equal amount.

“We are renewing the risks the majority of the time at (the) expiring (rate). It’s just the exposure base (that) is changing,” said Jennifer Tomilin, senior vp for commercial markets at Zurich North America Commercial in Schaumburg, Ill., a unit of Zurich Financial Services Group.

Ms. Tomilin said she has not seen the market turn aggressive.

“For the renewals that we retain, we are holding our rates stable,” she said. “On new business, we are able to get the rate we need for the exposure on that risk.”

But Eric Silverstein, casualty practice leader in Atlanta for broker Beecher Carlson Holdings Inc., said he has seen prices soften as insurers rely on recent investment earnings to gain a competitive advantage.

However, price decreases experienced during past renewals are affecting renewal negotiations, Mr. Silverstein said.

In general, he has seen a 5% discount for large accounts, but also said pricing is “very spotty,” varying from account to account.

With competition a factor, some buyers have found that moving their workers comp business from longtime insurers has resulted in a better price, said Willis HRH’s Ms. Ferrandino.

But policyholders considering that strategy also have to weigh collateral considerations, she and others agreed.

Incumbent insurers may have an advantage in retaining customers because they may hold “excess collateral” from past years that they can apply to a current year, several sources said.

In contrast, insurers that are new to an account generally require greater amounts of collateral.

“You have to look at that,” Mr. Zullo said. That, as well as CNA’s willingness to allow him to unbundle claims administration services, also was a factor shaping his decision to stay with CNA.