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Employees' vulnerability to terrorism affecting workers comp rates in major cities

Uncertainty over federal terrorism insurance backstop has comp insurers raising prices

Employees' vulnerability to terrorism affecting workers comp rates in major cities

Uncertainty about whether the federal government's terrorism insurance backstop will be renewed has resulted in limited workers compensation insurance capacity and increased prices for companies with large concentrations of employees in major cities such as New York, Chicago and Los Angeles.

Experts at Marsh Inc., Aon P.L.C., Lockton Cos. L.L.C. and Willis North America Inc. say the potential expiration of the backstop at the end of 2014 already is affecting financial institutions and other companies with at least 1,500 employees in a single major city.

The backstop, established by the Terrorism Risk Insurance Act of 2002, was renewed in 2005 and again in 2007 under the Terrorism Risk Insurance Program Reauthorization Act. Without congressional action, the 2007 law will expire Dec. 31.

Companies with workforces concentrated in major urban areas are seeing workers comp price increases of 5% to 10% as insurers look to limit potential terrorism-related exposures should the backstop lapse, said Christopher Flatt, New York-based leader of Marsh's Workers' Compensation Center of Excellence.

“I think carriers are viewing it as an opportunity to try to push prices up,” Mr. Flatt said. “In fact, we've gotten a number of inquiries from folks that are not currently writing workers comp on large-concentration risks who are looking to potentially enter the market because they see it as an opportunity to get some better-than-average rates on the business.”


Reacting to that uncertainty, the National Council on Compensation Insurance Inc. issued an endorsement last July that allows workers comp insurers to continue applying a premium charge for terrorism-related losses should the backstop expire. But only “a handful” of insurers use that endorsement, said Pam Ferrandino, executive vice president and casualty practice leader for Willis in New York.

Additionally, she said, some insurers have been unwilling to underwrite workers comp policies for companies with the most risk under TRIA uncertainty.

“Carriers just frankly have not been willing to offer the same level of limits in concentration-exposed areas, for the most part,” Ms. Ferrandino said. “They're just not going to offer statutory excess comp.”

Anthony DeFelice, managing director of Aon Risk Solutions' national casualty practice in New York, said some insurers are writing limited-term comp policies set to expire at the end of the year should the backstop lapse.

“Everybody's hoping that TRIA gets extended, but that's an unknown at this point in time,” Mr. DeFelice said. “Certain underwriters are taking precautions not to expose their bottom line or their companies to an unprotected terrorism type of event.”

The overall workers comp market has seen increases in pricing at renewal, experts say.


Eric Silverstein, Dallas-based senior vice president and risk management practice leader at Lockton, said about 53% of companies are expected to see higher workers comp premiums this year, while 15% could see a decrease at renewal.

Experts project that middle-market firms with guaranteed-cost workers comp programs can expect premium increases of 5% to 10%. National employers with large deductibles or retentions can expect 2% to 4% increases in prices, experts said.

“It's not a hard market, (but) it's a firming market,” said Peter Steffen, managing director of commercial risk for Aon Risk Solutions in Chicago.

Irving, Texas-based CEC Entertainment Inc., which operates Chuck E. Cheese's restaurants and has more than 17,000 employees nationwide, has seen little change due to the hardening market. The company is set to renew its large-deductible workers comp policy on March 1 with Ace Ltd. with relatively flat pricing, said Jeff Strege, CEC Entertainment's director of risk management.

“That program has been very stable for us,” said Mr. Strege, who said the company's comp pricing and program structure have remained relatively unchanged in recent years.


Marsh's Mr. Flatt said increased pricing is prompting more firms to take on high-deductible workers comp programs or to consider self-insurance.

Aon's Mr. Steffen said some insurers are offering lower-deductible options for workers comp to attract clients that do not want to secure letters of credit for loss-sensitive programs.

“I'm starting to see carriers that are coming out with a $50,000 deductible,” Mr. Steffen said. “If they can get the deductible low enough or a loss-sensitive structure in such a way that they don't have to charge collateral, that's more appealing to (guaranteed-cost) customers.”

Companies that receive the most favorable pricing are the ones that document their workers comp track record and prove to insurers they are a good risk, said Lockton's Mr. Silverstein. “You should be focused on how you can make your account look more profitable rather than just throwing it out there on a competitive basis,” he said.