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If the federal terrorism reinsurance backstop program isn't reauthorized during the first quarter of 2015, employers renewing their workers compensation coverage could be forced to the residual markets and face significant premium increases.
Established by the Terrorism Risk Insurance Act in 2002 following the Sept. 11, 2001, U.S. terrorist attacks, the program expired Dec. 31 due to objections in the Senate, surprising and dismaying insurers and buyers.
While many industry experts expect TRIA will be reauthorized by the new Congress that convenes Jan. 6, workers comp insurers and reinsurers are keeping quiet as they evaluate what risks they would underwrite without the backstop safety net, experts said.
“The market is still operating under the presumption that TRIA is going to be reauthorized in January,” said Robert Hartwig, president of the New York-based Insurance Information Institute. “If we get to the middle of February and there's still no reauthorization, that becomes a game changer.”
Though uncommon, some insurers are including language in workers comp policies that would allow them to rescind coverage for companies that have large concentrations of workers in “high-risk, Tier 1 cities” such as New York and San Francisco if TRIA isn't extended, Mr. Hartwig said.
Workers comp pricing also will spike in such areas, but “it will be muted initially,” he said.
It seems insurers are prepared to honor workers comp policies with effective dates through March, said Tim DeSett, executive vice president of risk practices at Lockton Cos. L.L.C. in Kansas City, Missouri.
Some insurers “have their own filed endorsements, which they used to say, "This is how much premium we are charging for terrorism risk,' “ said Pam Ferrandino, executive vice president and casualty practice leader at Willis North America Inc. in New York.
Such endorsements allow insurers to adjust their pricing down the road, she said.
Since terrorism coverage can't be excluded from workers comp policies in any state, insurers will look to limit any potential losses, sources said.
“I've heard from some carriers that they're trying ... to issue a nonrenewal notice for the entire account only so they can carve out the states where they have concentration,” Ms. Ferrandino said. In other words, they'd cancel a company's nationwide account and “issue a renewal term on an all-other-states basis.”
If TRIA hasn't been reauthorized by February, sources said some employers could have trouble renewing or purchasing traditional workers comp coverage and be forced into residual markets, known as the insurers of last resort.
The cost of residual market coverage could be “considerably higher,” according to a 2014 Rand Corp. report, which said 32 states and the District of Columbia have assigned risk pools, and 14 states direct all residual market business to competitive state funds.
While the Rand report said a nationwide estimate of residual market costs was not available, it did note that the Illinois Workers' Compensation Commission advised employers that premiums are 45% more in the residual market than the traditional market.
In addition, state workers comp funds could see their market share increase “significantly” as employers are denied coverage in the standard market, said Bruce Wood, Washington-based vice president and associate general counsel at the American Insurance Association.
“So if companies are forced into higher markets or residual markets, then laying off people becomes an option they would have to face,” said Carolyn Snow, Louisville, Kentucky-based director of risk management at Humana Inc.
TRIA's expiration didn't affect workers comp rates for Kelly Services Inc., which renewed its workers comp coverage with Ace Ltd. effective Jan. 1, said Gary Pearce, vice president of risk management group at the Troy, Michigan-based temporary staffing firm.
Mr. Pearce said Kelly Services is a more desirable risk since workers aren't concentrated in one high-risk area, but also said the company would be hit if TRIA is not reauthorized.
“Our employees are the first ones to be laid off,” Mr. Pearce said. “So to the extent that there's a deficient insurance backstop, that could hurt employment.”
Insurers also could be adversely affected, Mr. Wood said.
Workers comp insurers that leave the voluntary market to avoid terrorism losses still could be assigned to cover such risks in the residual markets for various states, he said.
“In that sense, there is nowhere to run and nowhere to hide,” Mr. Wood said.
Self-insured employers have unique concerns, since excess workers comp insurers can exclude terrorism risks from their policies, except in New York and Florida, Ms. Ferrandino said.
“To the extent that TRIA expiration reduces insurers' willingness to provide these alternatives to traditional (workers comp) coverage, self-insurance may become more difficult,” according to the Rand report.
Ms. Snow said Humana, which funds its comp coverage through its captive insurer, had not yet heard from its excess insurers following TRIA's expiration.
“The markets have just been really quiet,” Ms. Snow said. “I suspect it's because they expect action in the first quarter, but it's kind of been surprising how quiet (insurers and reinsurers) have been. ... Everything at this point is speculation.”