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Workers comp risks take larger bite of total costs

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More primary casualty buyers remained loyal to their incumbent insurers in 2005 compared with 2004, while workers compensation took an increasingly prominent position in most companies' overall cost of casualty risk, a survey concludes.

In addition, Marsh Inc.'s "Casualty Cost of Risk 2006" survey found that policyholders in general reduced their cost of casualty risk in 2005 by 3% while retaining slightly more risk. The report is slated for release this week.

New York-based Marsh examined the 2005 insurance placements of 1,638 casualty buyers. About one-third reported revenues of $1 billion or more, and 35.5% reported revenues of $200 million or less. To get more meaningful comparisons, Marsh also examined the cost trends for policyholders for which it has two consecutive years of data.

The overall cost of casualty risk for those policyholders for which Marsh has 2004 and 2005 data, about 75% of the total, decreased 3% in 2005 to $2.48 per $1,000 of revenue. The cost reflects primary casualty insurance premiums, retained losses and claims handling expenses.

According to the report, retentions in 2005 rose 2.2% in workers compensation as the cost of risk fell 4.1% to $1.52 per $1,000 in revenue. Retentions rose 6% in auto liability as costs dropped 5.3% to 32 cents. In general liability, retentions dropped 4.5% while costs rose 4.1% to 64 cents.

George C. Pallis, a managing director in Marsh's national casualty practice and the study's publisher, said that despite a relatively stable casualty market, companies continue to "fine-tune" their casualty programs to strike the right balance between their premium costs and retention levels. "It's an ongoing struggle," he said.

Among the reports' significant findings, Mr. Pallis noted that a more stable casualty market resulted in fewer casualty buyers--one in nine--switching insurers last year compared to 2004 when one in four policyholders did so.

"We think that's a function of the market staying relatively flat," Mr. Pallis said. "There weren't any great opportunities for significant changes in pricing that would make it worthwhile for people to leave their incumbent if they were happy with their program, structure and service."

In 2004, "prices were really on the decline, so there were more opportunities for savings. The market was just more competitive," he said.

Meanwhile, workers compensation costs continue to far exceed those associated with auto liability and general liability, the report said.

In 2005, 67 cents of each casualty dollar spent went to workers comp, up from 64 cents in 2004 and 63 cents in 2003.

In 2005, general liability represented 22 cents of every casualty dollar and auto liability 11 cents, the report said.

Mr. Pallis attributed rising workers comp costs to increased utilization and rising medical costs, which have been out-pacing the general cost of living "by a wide margin" over the last several years.

The average individual workers comp claim cost incurred by all 23 industries Marsh studied for the 2004 accident year was $6,109, the report said. Of that amount, $3,238 went to medical costs, $2,413 for indemnity costs and $458 for expense.

Of the industries studied, the mining and energy industry had the highest average incurred cost per claim at $10,915, while transportation equipment companies had the lowest costs at $2,828 per claim.

At $9.76 per $1,000 of revenue, governmental entities had the highest overall workers comp costs, while insurance companies had the lowest cost at 34 cents.

The report is available at no cost by contacting Marsh's Donna Mohan at 212-345-5343.