Workers compensation reinsurance pricing remained fairly flat at the January 1, 2009 renewal. Rates on line (ROL) declined slightly for multi-claimant catastrophe programs, and rate reductions for single-claimant exposed programs were slight (if not flat). Reinsurers had sought to turn the tide of rate and ROL decreases of 10 percent or more over the last several renewals. Cedent goals, on the other hand, were to lower (or at most maintain) expiring rates on typically decreasing Subject Premium volumes for larger programs.
Multi-Claimant Workers Compensation
Multi-claimant workers compensation catastrophe layer ROLs dropped on average by 2.3 percent; however, the ratio of ROL increases to ROL decreases was fairly balanced. Forty-three percent of programs renewed with increasing ROLs, while 46 percent renewed with decreases. Eleven percent renewed as expiring.
|Click a chart to view a larger version|
Where there was movement in ROLs, it appears that swings in Subject Premium projections drove pricing changes more than a competitive reinsurance market or underlying exposure changes.
Single-Claimant Workers Compensation
Single-claimant workers compensation program rates, on average, experienced a slight decrease of 1.2 percent. But, sixty-five percent of the layers renewed at the expiring rate. The largest decreases were attributable to smaller programs with significant Subject Premium increases and favorable loss experiences.
|Click a chart to view a larger version|
Heading into the January 1, 2009 renewal, across-the-board increases in reinsurance rates seemed like a distinct possibility. Reinsurers claimed that their abilities to replenish capital were in doubt … and that the cost to do so was increasing. Though similar attempts were made (mostly unsuccessfully) during the January 2006 renewal (following Hurricanes Katrina, Rita, and Wilma), the financial events of September and October 2008 were fresh in everyone’s minds, adding a sense of urgency to the situation for 2009 renewal.
The quoting process proceeded as it had in past years, and firm orders were established based on the more aggressive quotes offered. Larger capacity and California earthquake-exposed multi-claimant catastrophe programs did not experience the same level of oversubscription as in years past and took additional time to complete. There was some reinsurer displacement, and several prominent reinsurers withdrew or reduced capacity.
Price remained the primary driver for cedents, though market security and reinsurer ratings gained ground, particularly as a result of the ongoing financial catastrophe. The trend of Maximum Any One Life (MAOL) warranty increases continued, with more than 50 percent of the renewing catastrophe programs increasing the MAOL warranty beyond USD5,000,000.
Terrorism capacity and coverage options for terrorism will continue to emerge for workers compensation, especially for smaller clients with footprints outside major metropolitan areas. Seventy-seven percent of the layers at January 1, 2009 renewed with terrorism coverage excluding Nuclear, Biological, Chemical, and Radiological (NBCR). Although there was an increase in the number of layers providing NBCR coverage, reinsurers remain very cautious providing significant terrorism capacity which includes NBCR coverage.
Outlook for 2009
The stabilization of pricing at January 1, 2009 should continue for subsequent renewals throughout the year. To improve pricing, coverage terms, and the availability of capacity, cedents and intermediaries will need to focus on accumulation management, underwriting standards, and claims management.
We expect that rating agencies will continue to develop loss scenario and accumulation stress testing, which will require clients to continue to refine, define, and demonstrate the quality of the location data collected. Guy Carpenter’s Workers Compensation Specialty Practice will be monitoring and reporting the effects of the economic slowdown on payrolls — which will have an effect on projected premiums and may affect loss patterns and loss ratios.