The impact of the recession has been particularly difficult on the workers compensation line of business. The convergence of shrinking premiums, higher overall primary loss costs and extremely low investment rates make profitability in this line a challenge to achieve. The current workers compensation market lack of profitability was recently described as a time bomb that will become even more costly when inflation shoots up. The national unemployment rate in November 2010 was 9.2 percent. A continued lack of business confidence in the construction and industrial sectors combined with wage growth well below historical averages continue to put extreme pressure on cedents’ subject premiums. Country-wide workers compensation premium has fallen from nearly USD48 billion in 2005 to just over USD34 billion in 2009. The two principal reasons for this 29 percent decline are rate reductions and recession-reduced payrolls.
Pricing competition among the primary markets in the last few years has been aggressive as cedents attempt to retain their accounts and maintain premium levels and market shares in a declining rate environment. According to the National Council on Compensation Insurance, the ratio of voluntary market rate filing decreases was four times the level of rate increases between 2007 and 2009. The rate of decreases to increases for 2010/2011 season has so far has leveled off to 17 states with decreases to 14 states with increases. Three large jurisdictions, California, Florida and New York are all looking at primary rate increase recommendations for 2011.
Heading into 2011, workers compensation treaty reinsurance renewal activity has to navigate the same headwinds from the overall lackluster economy and employment challenges of the primary market. The workers compensation treaty reinsurance market can be separated into two different segments. The first being described as “working layer” or single claimant exposed reinsurance and the second responding to multi-claimant losses or catastrophe reinsurance.
Typical working layer limits are in layered bands providing coverage up to USD10 million. We are seeing more companies looking for limits greater than USD10 million and expect that the interest in additional limits will increase as severity trends continue to increase. The underlying loss ratio is a factor in pricing working layer coverages and with industry loss ratios increasing over the last four years, we have seen reinsurance pricing for working layer reinsurance stabilize and reinsurers are quoting rate increases. There is a limited core group of reinsurers that lead these working layers which means that there is not the same competition among reinsurers for working layers as for the catastrophe layers.
During the major renewal dates of 2010 working layers where comparison was possible, pricing tended either to increase or remain as expiring. Rate decreases were limited. We expect a similar outcome from the January 1, 2011 working layer renewals.
Standard workers compensation multi-claimant / catastrophe layer capacity is about USD500 million for natural hazard and man made disaster events. Capacity is well in excess of what is required by only a few large workers compensation carriers. The workers compensation catastrophe reinsurance market has experienced continued price softening since 2003 along with more generous terms and conditions. During the major renewal dates of 2010, rate on line (ROL) decreases dominated increases or expiring ROLs. Average ROL decrease was over 7 percent with the typical range of decreases being from 5 percent to 10 percent. We are seeing a similar average decreases in an early review of bound January 1, 2011 renewals.
There is a loss limiting feature to the workers compensation catastrophe product referred to as a maximum any one life warranty, referred to as the MAOL. The MAOL is the maximum that any one injured employee can contribute to the loss. MAOL’s have evolved from USD2 million in 2002 to USD10 million or more in 2010. In addition to the ample capacity for workers compensation catastrophe business, workers compensation catastrophe models for earthquake were updated in 2009, and ceding company projected losses for return periods at 100 and 250 years reduced notably from the prior model versions.
There are two fairly recent developments in workers compensation reinsurance. Working layer reinsurer demands for additional catastrophe capacity in exchange for supporting working layers and ceding company strategies involving reinsurance purchasing.
In the working layer sector, there is a small group of reinsurers who have invested the resources to evaluate and support single claimant exposed reinsurance. Severity trends and the 10-20 year tail exposure to medical inflation (in a challenging investment market) have reinsurers being cautious in supporting working layers. In order to support working layers we are seeing an increasing number of reinsurers require sizeable minimum lines from the overlying workers compensation catastrophe programs to help subsidize the working layer risk. Many stand-alone workers compensation catastrophe-only reinsurers are seeing their capacity reduced in order for the reinsurers supporting the critical working layers to get their minimum requirements.
The overall market appears to be quoting a little later than usual, and it looks like it may be tied to more structure / program changes than usual for the January 1, 2011 renewals. Some clients are sensing an increased exposure to workers compensation volatility in 2011 and are seeking additional stability by reducing their working layer retentions.
Other companies are looking at structure changes tied to the decision to reduce the reinsurance “spend” in addressing expense ratio pressures. Ceding companies are making some very difficult decisions with their reinsurance buying based on controlling / reducing expense ratios.