Tough financial climate shaping workers comp pricingPosted On: Jul. 5, 2009 12:00 AM CST
Tight credit availability, layoffs, bankruptcies and competition among insurers are shaping workers compensation pricing as employers renew their policies in a transitioning market.
More so this year than recent years, employers with large-deductible programs that renew at midyear are evaluating the costs of collateral alongside premiums, several brokers and insurers say.
Renewal premiums for large-deductible policies now vary significantly as insurers push for increases only to be thwarted in some cases by competition, brokers and insurers say.
“It is truly a market in transition and (price) varies tremendously from company to company,” said Eric Silverstein, casualty practice leader in Atlanta for broker Beecher Carlson Holdings Inc.
“You are seeing more of a dispersed marketplace when it comes to pricing,” agreed Don Pickens, Boston-based Liberty Mutual Group Inc.'s executive vp and chief underwriting officer for national markets.
After several years of falling prices in a soft market, some large-deductible workers comp accounts now are experiencing increases of about 5%, several experts agree. However, other large-deductible accounts recently received premium reductions of about 5%.
Meanwhile, renewal pricing for guaranteed-cost coverage, typically purchased by midsize employers, has been fairly consistent, sources say. Prices for guaranteed-cost programs began flattening, or even turning up slightly in some cases, during the second quarter, said Tony Ciofani, executive vp and chief underwriting officer for Blue Bell, Pa.-based PMA Insurance Group.
Medical inflation and insurers' deteriorating combined ratios have stopped price decreases, Mr. Ciofani added.
“I think it has reached a point where the market has to achieve some equilibrium, Mr. Ciofani said. Insurers “just can't continue to deteriorate from a combined ratio standpoint.”
But Jim Miraval, director of commercial risk for Aon Corp. in New York, said guaranteed-cost buyers are seeing premium decreases averaging 5% with plenty of insurers offering the policies.
Employer losses however, are impacting pricing.
Oak Brook, Ill.-based Advocate Health Care Network's experience modification rating for workers comp claims jumped 16% compared with last year, so it saw a 7.9% premium increase for its June 1 renewal, said Gregory Browne, director of insurance and risk management at the health care organization.
While Advocate's payroll increased nearly 2%, the experience modification eroded his bargaining power, Mr. Browne said. Yet he was able to talk down the insurer to reduce its original quote calling for an 18% increase.
For excess workers comp insurance, the market remains competitive with stable pricing “despite the pending increases in rates in California,” said Jane A. Keegan, enterprise risk manager for the Port of Oakland in California.
The port experienced a 4% premium decrease for its May renewal, which is less than the 15% decrease it received last year.
For companies purchasing large-deductible policies, their overall financial picture now is among factors insurers use to price coverage, Beecher Carlson's Mr. Silverstein said.
Rising bankruptcies have insurers concerned that defunct businesses may not pay all their premiums and leave their insurer stuck with claims that should have been paid by the company, several sources said.
Bankruptcies and “uncollectibles” shape how insurers view their potential profitability, Mr. Pickens agreed.
“If you think about how carriers are going to afford (uncollectibles), it's going to be through some type of price mechanism or more stringent security,” Mr. Pickens said.
Layoffs and shrinking employer payrolls also are exerting upward pressure on price and eroding employers' negotiating position.
In some cases, employers are finding they have less leverage with insurers because their employee headcount has shrunk, Aon's Mr. Miraval said.
Insurers are attempting to offset a shrinking exposure base by raising rates, several sources added. So even though employers may have fewer employees, they may have to pay more per employee for workers comp coverage.
Even in the face of shrinking exposures, insurers still must fund their infrastructure and the services they provide, said Liberty Mutual's Mr. Pickens.
“At some point, your top line has to support your operations, so (shrinking payroll) is having an impact on pricing,” Mr. Pickens said.
But workers comp insurers trying to raise prices are running into competition hungry for new accounts, said Tony Tam, a managing director in the U.S. casualty practice for Marsh Inc. in New York.
There exists a “push-pull effect keeping a hard market from coming full force,” at least for now, Mr. Tam said.
Some insurers have been adamant about maintaining their pricing for midyear renewals, only to give a bit when buyers find a better quote, Mr. Tam said. The amount the incumbent eventually gives up, however, may not be as great a reduction as offered by a competing insurer.
That is angering some policyholders who complain their insurer “partner” should give them their lowest possible quote at the outset, Mr. Tam said.
But some buyers are holding off on changing insurers, despite price differences, because of collateral cost concerns, he said.
When policyholders with large deductibles change insurers, they must post collateral with the new underwriter while leaving existing collateral in place with their former insurer, Mr. Tam said.
With the cost of letters of credit typically posted as collateral having increased three-fold or more recently, the expense of posting collateral with two insurers can easily offset the reduction in premium by moving to a new insurer, Mr. Tam said.
Risk managers are under greater pressure from upper management to reduce their use of collateral, Mr. Silverstein said.
Simultaneously, insurer credit managers are under pressure to aggressively manage their risk and not allow overgenerous credit terms when banks are demanding top dollar for letters of credit.
“So the negotiations with respect to collateral are becoming more difficult,” Mr. Silverstein said.
In a few cases, though, some insurers are allowing customers to post cash for collateral rather than expensive letters of credit. Such arrangements depend on the client's financial strength, several observers said.