Aaron Bueler, Managing Director and Emil Metropoulos, Senior Vice President 

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.

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Emil Metropoulos, Senior Vice President
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Some casualty risk accumulations stay hidden, but this doesn’t mean your exposure disappears. A single event could trigger a chain reaction of insured losses on professional and product liability covers, depleting your capital and possibly destroying shareholder value. In extreme cases, even solvency could be threatened. Using Guy Carpenter’s Casualty Cat model, developed jointly with Arium, Ltd., it’s possible to identify some of these “casualty catastrophe” risks early — before they drain your balance sheet.

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Emil Metropoulos, Senior Vice President
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We are surrounded by casualty clash and catastrophe risk. Especially in today’s interconnected and turbulent business environment, these threats can pervade a large insurer’s portfolio, imperiling balance sheet strength and shareholder returns. For the past 20 years, we have seen the rapid escalation of casualty clash and catastrophe risk, and the trend is unlikely to abate. If anything, it will gather more momentum. Consequently, we may be on the brink of a casualty clash and catastrophe renaissance, to be fueled by the capital management agendas of large casualty writers that need to address a lingering, concealed exposure that has long been elusive.

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Emil Metropoulos, Senior Vice President
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Perhaps because of market conditions last year — and a general increase in awareness — larger insurers paid more attention to casualty clash and catastrophe risk at the Jan. 1, 2009, reinsurance renewal. This followed several years in which they did not secure much protection. Even with the increase in interest in this form of cover, capacity was adequate, and pricing remained stable. Historically, product availability, terms and pricing prevented the widespread purchase of protection. Since many of these cedents now have larger net lines on their portfolios — and plenty of available reinsurance capacity — they are beginning to secure the protection they need. Changes in capital availability and terms have helped cedents.

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Emil Metropoulos, Senior Vice President
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The global financial crisis that has unleashed havoc on credit and equity markets is the most recent casualty catastrophe (with both systemic and classic clash characteristics), and it may be the largest in recent memory … but it certainly isn’t the first. In fact, there have been many, and their frequency has increased over the past two decades, allowing financial markets little reprieve from one disaster to the next.

The stock market crash of Oct. 19, 1987, kicked off the modern casualty catastrophe age. The Dow Jones Industrial Average lost 22 percent of its value, earning the event the appellation “Black Monday.” Since then, we have endured the initial public offering (IPO) laddering and equity analyst scandals associated with the “dot-com bubble,” as well as accounting irregularities at Enron, Tyco, WorldCom, Adelphia and others. The loss of shareholders’ wealth with each of these events was profound, but none has been as severe as the one that currently has the world’s financial markets in its grasp.

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Emil Metropoulos, Senior Vice President
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Remoteness has been used to downplay the threat, causing carriers to overlook a more immediate, though less menacing, concern. A substantial loss may not imperil company operations, but it could lead to an unexpected earnings hit, the effects of which would be magnified for shareholders. Unanticipated large losses typically result in a disproportionate impact on market capitalization. Casualty clash and catastrophe protection, consequently, can be a vital tool in managing overall financial performance.

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Emil Metropoulos, Senior Vice President
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Some workers compensation risks seem too difficult to cover. Excess loss rates are unpredictable, on the rise and difficult to analyze with the conventional tools. And, reinsurance may not be available at some layers. A carrier that can find ways to write business for these groups, however, can identify a revenue opportunity ahead of its competitors. Together, reliable modeling and disciplined underwriting can open new markets in a mature industry in which peers tend to look for merely incremental advantages. Using Guy Carpenter’s Reveal® v1.1 excess loss model, now available through the i-aXs® platform, workers compensation carriers can identify the drivers of severity at the class code level, making it possible to develop a plan for protecting capital and profitability.

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Casualty Cat Part I: Casualty Catastrophe Risk Modeling >>

Casualty Cat Part II: Tracking Integrated, Intricate Risks >>

Casualty Cat Part III: Enterprise-Wide Evaluation >>

Casualty Cat Part IV: Casualty Cat Exposes Exposure >>

Casualty Cat Part V: Case Study >>

Casualty Cat Part VI: Enterprise Protection, Capital Optimization >>

Emil Metropoulos, Senior Vice President
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Casualty risk is changing. Single risks have become the portals by which catastrophes can enter a portfolio. The action is swift, and the consequences severe. Warnings are few … if there are any at all. The only protection possible is to be proactive: casualty writers must plan now for events that cannot be anticipated. While this has been close to impossible in the past, the application of a well-planned Enterprise Risk Management (ERM) framework supported by a cutting-edge casualty catastrophe model can provide the insights needed to make informed decisions about the capital a carrier puts at risk.

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Emil Metropoulos, Senior Vice President
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Consider hypothetical commercial property construction and development company “X,” which has several high-profile commercial office projects around the world. In this scenario, the company was found to have massively underestimated both development costs (due in part to negligent risk management advice received from the insurer’s environmental audit team) and projected occupancy rental returns at two important commercial office sites in a major city (e.g., London, New York, Dubai, or Shanghai).

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