With both the indemnity and medical severity components continuing to rise, the cost of workers compensation insurance remains a top concern for all employers, despite favorable trends in reduced claim frequency. The recession has further put pressure on wages that are being outpaced by indemnity inflation. Workers compensation medical inflation also continues to grow faster than the Medical Consumer Price Index. Despite these trends, primary workers compensation writers remained competitive by either keeping rates flat or granting reductions up to 5 percent on premium rates. Insurers attempted to write new business to offset lost premium caused by exposure decreases across their portfolios.
Insurers are seeing higher unemployment levels drive decreases in payroll as well as shifts from construction to other classes. This trend, along with rate reductions arising from the competitive market, are leading insurers to see their subject premium estimates decrease by an average of 9 percent year over year. Revised 2009 subject premium estimates were down 5 percent from their original projections for the January 1 renewals
The outlook for 2010 will continue to be dominated by economic issues such as payroll levels, medical inflation increases, and potential changes in loss frequency as unemployed workers begin filing claims after benefits expire. As the job market recovers and workers start new jobs, there is some historical evidence to suggest that frequency trends may flatten out or increase. Insureds that continue to improve the quality of data provided to reinsurers tend to secure the best renewal terms. Underlying primary market uncertainty resulted in different reinsurer responses in the multi-person catastrophe and single-person exposed worker layer segments.
Workers Compensation catastrophe reinsurance also continued to exhibit market softening as reinsurers competed for premium in this line, which exhibited another good year of little to no loss activity. As a result, capacity was ample for a majority of the multi-person exposed layers including covers that included different forms of terrorism coverage and higher Maximum Any One Life (MAOL) terms. Adding to the market softness at the end of 2009 were notable earthquake model changes that resulted in reductions in modeled loss output. Some Insurers with expense ratio pressures due to falling top line premiums contemplated increased retentions based on the updated model output. However, most insurers maintained similar catastrophe limit purchases for 2010, due to price decreases and favorable terms and conditions. Rates on line for catastrophe reinsurance decreased an average of 9 percent with 88 percent of layers achieving rate decreases (Exhibit I).
Workers Compensation Cat – 2010 Renewal ROL changes – Exhibit I
Those insurers able to minimize any reductions in their subject premium while benefiting from the reduced modeled loss cost were able to achieve the rate on line reductions in the 5 percent to 17 percent range seen in Exhibit II. Whereas those insurers exhibiting notable payroll and subject premium decreases and/or higher loss costs encountered reinsurer minimum premium thresholds resulting in the flat to 6 percent rate on line increases seen in Exhibit II.
Typical Excess of Loss Casualty Reinsurance Exhibit II
Uncertainty around working layer pricing remained highly sensitive to job loss, economic recovery, medical inflation and a rise in permanent total claim frequency. The divergence between a competitive primary market and the reinsurance markets’ need for rate increases to offset higher loss costs and lower investment income was clearly evident at the end of 2009. Capacity in the single person exposed working layers remained steady with a still limited number of reinsurers providing capacity. Some of the working layer reinsurers requested, or required, participation on catastrophe programs to support their working layer participations. Average rate changes in this segment were relatively flat and typical rate movements were in a range of declines of 12 percent to increases of 11 percent. Where they fell in this wide range was dependant on specific exposure reductions and specific loss experience.