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An increasing number of U.S. employers seeking workers compensation insurance coverage are getting pushed into their states' markets of last resort as insurers walk away from riskier, less profitable accounts.
The size of employers forced to turn to the workers comp residual market also is growing, experts said.
Employers are turning to the residual markets as insurers raise their workers comp prices—particularly for less desirable accounts—in the face of insufficient investment income and rising medical and indemnity costs.
For example, a California manufacturing company with about 125 employees recently had little choice but to buy coverage from the market of last resort, the State Compensation Insurance Fund, said Stephen Paulin, senior vp at broker SullivanCurtisMonroe Insurance Services L.L.C. in Irvine, Calif., speaking about one of his clients.
The manufacturer's workers comp insurer sought a renewal price increase exceeding 40%, Mr. Paulin said. The premium increase was driven by a rise in the employer's experience modification rating, an overall rate increase and the underwriter cutting back on credit deductions it previously made available, he said.
“We were not able to get another private carrier interested, and the state fund was able to do it for 15% less” than the underwriter, Mr. Paulin said. Insurers “are basically saying, "We are standing our ground, we need to get more money, and we may lose some business as a result.'”
To guarantee insurance availability for employers turned down by voluntary-market insurers, some states require all workers comp insurers underwriting coverage to participate in a residual market pool. Those employers are then assigned to individual pool participants.
States, like California, rely on their competitive state funds or a single insurer to provide residual or market-of-last-resort coverage. California's state fund prefers to think of itself as the “available market,” rather than the market of last resort, said Tom Clark, the San Francisco-based fund's chief financial officer.
Nationally, new accounts and existing business assigned to the residual market increased 31% during the first half of 2012 over the prior-year period in the 21 states where Boca Raton, Fla.-based NCCI Holdings Inc. functions as the residual market plan administrator.
The residual market growth during the first half of the year accounts for an 89% increase in premium volume, said James R. Nau, NCCI's general manager for residual markets.
After shrinking for six straight years, the turning point in residual market growth came during the second half of 2011, then accelerated with January 2012 renewals, according to NCCI.
“It came quickly starting in January, but for me it appears as just part of the normal cycle that we see with residual markets growing and shrinking as the voluntary market changes,” Mr. Nau said.
In California and other states, more employers are turning to the state fund as firming in the overall workers comp insurance market narrows their choices, experts said.
“We started (seeing) a trend around the beginning of this year,” Mr. Clark of the California fund said. “Since January, (the state fund is) up 34% on new business.”
That does not include renewal business seeking state fund coverage, he said. While the California market is transitioning from a “very soft market into a less soft market, it's certainly not anywhere close to a hard market yet,” he said.
In other states, a hard market already has arrived for certain employers.
Meanwhile, NCCI's first-half report shows the percentage of larger company accounts entering the residual work comp markets also is up, Mr. Nau said.
The incidence of new and existing accounts generating at least $100,000 each in annual premiums turning to the residual market for insurance increased by 80% during the second quarter of 2012, compared with the same period in 2011, Mr. Nau said.
An employer generating $100,000 in premium may not seem like a large account to some workers comp experts. But about 80% of accounts that participate in NCCI-administered residual markets generate premiums of less than $25,000 annually.
“For us, it's big when you have an over-$100,000 account,” Mr. Nau said.
California's state fund is experiencing a similar growth trend of larger employers—those generating annual premiums ranging from $25,000 to $250,000—turning to the state fund, Mr. Clark said.
However, some states are lagging in the trend of a hardening insurance market, and therefore employers there aren't being driven into their market of last resort.
In Kentucky, for example, enough workers comp underwriters continue to seek cash flow rather than focusing on underwriting discipline, so the market remains soft, said Roger Fries, president and CEO at Lexington-based Kentucky Employers' Mutual Insurance.
While Kentucky Employers is a competitive, mutual insurer, it also acts as the state's workers comp market of last resort, and Mr. Fries said he has not seen an increase in residual market business.
“There are some parts of the country where the market is hardening somewhat right now,” Mr. Fries said. “And there are other parts of the country where it hasn't changed a bit, and I believe we are in that category.”