July 20th, 2011

Focus on Hurricane Season at July 1, 2011 Reinsurance Renewal: Workers Compensation

Posted at 1:00 AM ET

Those reinsurers that provide a majority of the workers compensation reinsurance capacity also suffered losses from the catastrophic events of the first and second quarters of 2011. The top 20 reinsurance groups assuming workers compensation reinsurance premium declared losses of nearly USD13 billion. On average, the losses represent nearly 9 percent of the 2010 year-end stated group equity for the top 20 workers compensation reinsurance markets.

Unlike the 2006 renewal season (post Hurricanes Katrina, Rita and Wilma), when reinsurers sought rate increases but were bound at rate decreases, July 1, 2011 renewals wrestled with new, enhanced pressure to increase rates.

One of the annual bellwethers for the primary workers compensation industry is the May National Council on Compensation Insurance Annual Issues Symposium. The primary workers compensation market results presented this year continued to erode due to a variety of economic and market cycle factors. The calendar year combined ratio increased from 110 percent to 115 percent and the long-term trend of reducing frequency of loss has reversed, with an adjusted up tick in loss frequency noted in 2010. Rate- making bureaus indicated primary rate increases for more US states this year, compared to recent history. Depending on carrier discount, we may start to see premium increases in the primary market.

Working layer reinsurance, structured to provide coverage to occurrences that involve one or more injured workers, is dependant on primary loss ratios. The increased loss ratios combined with low investment/interest rates and fears of increased inflation rates resulted in very few working layer reinsurance price decreases. Any decreases were tied to either shifts in the portfolio to less hazardous classes of business or superior individual company experience.

Catastrophe layer reinsurance, structured to cover larger, multi-claimant events, is more dependent on exposure concentrations, modeled output, cost of capital trends and reinsurer aggregate budgets/appetites. Ceding company data sets have steadily improved over the years and the best catastrophe reinsurance pricing is rewarded to companies with the most complete data sets.

Second quarter renewals followed the trends observed at January 1, 2011 with, on average, flat to slight rate increases for working layers and mid to high single digit rate on line decreases for multi-claimant catastrophe layers.

For July 1, reinsurers quoted increased rates on renewal structures. Buyers reacted by seeking an increased number of structure options to find a fit within typically shrinking reinsurance budgets. (Ceding companies are still hampered by decreased premium volume due to depressed payrolls and primary premium decreases).

The original quoted rate increases and increased number of additional options sought have resulted in delayed final placed firm order terms compared to previous July 1 renewals. Programs are being bound later than usual and the final July 1 workers compensation reinsurance rate level index will not be available until all the final renewal data has been analyzed.

We also observed the following shifting on July 1 program terms and conditions trends:

  • Non-earthquake exposed catastrophe programs were renewed flat.
  • Pressure to increase rates on earthquake exposed programs resulted in several restructures, in order to hold costs to expiring dollars.
  • Working layers are continuing to feel upward rate pressures.
  • Regional, rural and smaller employer terrorism reinsurance program capacity is available for companies in order to buy down their Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) retentions.
  • There is increased pressure from reinsurers to pick and choose participations on programs with both working layer and multi-claimant catastrophe layers.

Click here to register to receive e-mail updates >>

AddThis Feed Button
Bookmark and Share


Related Posts