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Buyers benefit from declining prices in workers comp

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Workers compensation insurers are agreeing to substantial price reductions as they try to hold on to market share in a competitive environment, brokers say.

Renewing accounts are experiencing price reductions of 15% to more than 20%, they say.

In addition, in a few limited instances, workers comp insurers are going as far as offering multi-year price guarantees, and others have eased up on collateral requirements for large, self insured deductible programs, they say.

A growing number of insurers are eager to quote on casualty business, and workers comp price decreases are biggest for nationwide accounts with California risks.

"The incumbent carriers are doing what they need to do to keep business," said Noreen Graham, managing director in Woodland Hills, Calif., for brokerage Beecher Carlson. "We are really seeing them step up and slash prices because you usually will have a dark horse that comes in" to compete for the business.

Price competition is vigorous and purchasers in large-deductible plans are finding insurers willing to move to guaranteed-cost programs, said Rich Marko, senior vp of commercial strategic services for Liberty Mutual Group in Boston.

Other insurers, however, say that while filed rates generally are declining, their pricing is not deviating substantially from those filed rates and that they are maintaining strong underwriting standards and market share.

While current market conditions make it difficult for insurers to attract new business, they do appear to be holding on to existing clients, said Richard Thomas, AIG senior vp and chief underwriting officer in New York.

Nor are some insurers seeing a big reduction in sizable employers that prefer to retain some risk in the form of large-deductible programs.

"It certainly is not that kind of irrational market where guaranteed cost (has become) real attractive on a broad scale for large risks that would normally be in the large-deductible market," said Paul Ramont, vp of workers comp product management and underwriting for Travelers Cos. Inc. in Hartford, Conn.

Nationwide, insurers also say current rates appear adequate while loss trends remain favorable because of reforms states have adopted in recent years.

Several, insurers, however, declined to discuss their pricing strategy.

California, meanwhile, is a major factor in the workers comp outlook nationwide and is helping both insurers and buyers, observers across the industry agree.

Reforms that California adopted in 2003 and 2004 in particular are helping reduce losses. California's market size means many nationwide employers have some workers comp risks in the state-helping their overall risk profile, observers say.

But results from the state may be skewing the nation's comp outlook.

Boca Raton, Fla.-based NCCI Holdings Inc., in its annual "State of the Line" workers comp analysis released in May, reported that insurers' calendar year combined ratio was at 96.5% for 2006. That represents the best underwriting results in at least 30 years and the first underwriting profit for the line since 1995.

However, excluding California from those results would have pushed insurers' calendar year combined ratio past 105%, NCCI said.

"This somewhat dampens the overall results for the entire country, and it reminds us of the distortions caused by a single large state that is adjusting to its post-reform environment," the NCCI report stated.

Excluding California's results would also have raised insurers' nationwide accident year combined ratio from 87% to 95%. The 87% accident year combined ratio is a significant improvement on the 140% combined ratio workers comp underwriters earned in 1999, the most recent peak, the report stated.

With several favorable factors, including insurers' improved reserve position and the continuing decline in claims frequency, NCCI said it has an "optimistic" short-term view of the line. NCCI's long-term view remains cautionary, though, because of skyrocketing medical costs, low investment returns and other factors.

Even so, observers say system reforms in other large states, such as Florida and Texas, also are helping reduce losses, while recent reforms in New York could help improve rates there.

Buyers recently renewing their accounts have plenty of choices on how to structure their programs, said Kevin Orphan, senior associate in San Francisco for Integro Insurance Services.

One California manufacturer, for example, opted for a 5% renewal price decrease rather than a steeper reduction, Mr. Orphan said. Instead, the manufacturer reduced its deductible from $350,000 to $250,000 because it recently increased production hours and expected additional claims.

That particular client renewed May 1, but "the trend is definitely continuing into July," Mr. Orphan said.

Mr. Orphan said he has seen two deals in which an insurer promised in writing to hold its pricing level when the customer renews it coverage the following year. Several insurers said, though, that they have not participated in such arrangements.

Insurers looking to hold the line on pricing are finding other ways to boost their competitive standing, observers say.

For example, insurers have allowed buyers to make lower collateral payments for large, self-insured retentions provided the payments are made in cash rather than letters of credit, Beecher Carlson's Ms. Graham said.

Because insurers get the cash up front, they can invest it. Therefore, they are willing to discount the amount of collateral required, Ms. Graham said. Businesses also benefit because they can deduct the cash as an insurance premium on their taxes.

Even in a softening market, though, insurers do not automatically make their best pricing or arrangements obvious, said Nick Kapatos, senior vp and enterprise risk manager for Sterling Bank in Houston.

Risk managers still must push their brokers and insurers for favorable terms, Mr. Kapatos said.

Sterling's workers comp rate per employee decreased for its midyear renewal in part because Travelers covered the bank, which has about 1,000 employees, through a different Travelers unit and that unit deviated from filed rates more so than another unit that previously insured Sterling, he said.

"At the end of the day, it's all negotiation and being on one's toes to make sure they are giving you the best deal," Mr. Kapatos said.