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By ART CADORINE, ACAS, vice president, ISO

As populations continue to increase and expand into catastrophe-prone areas, workers' comp exposures are increasing accordingly. Dealing with the claims aftermath of a catastrophe event is no longer a question of if--it has become a matter of when and how much.

Of all the threats to the workers' compensation line, earthquake exposure is the biggest. Not confined to the major fault lines in the Western United States, the earthquake threat also includes the New Madrid seismic zone in the Southern and Midwestern United States and fault lines running throughout the Northeast. Earthquakes are truly a countrywide threat with the potential for inflicting massive workers' comp losses.

That's because earthquakes can affect large areas hundreds of miles wide and cause varying degrees of structural damage and severity of physical injury. The workers' comp claims that follow such events can have a large impact on insurers' results over a long period of time.

Earthquakes cause more partial building collapses than total collapses. In total building collapses, fatalities are high, and insurers can settle claims in a relatively short time frame. Partial collapses cause fewer deaths but more injuries ranging in severity, however, which means insurers will be paying out more workers' comp claims over the long term.

If a major earthquake strikes the downtown area of a large city during business hours, the workers' comp claims of an insurer with high exposure in the area could be staggering.

ASSESSMENT TOOLS WANTED

Proper assessment of workers' comp exposure and potential losses is critical, but conducting such an assessment is no small feat. Unfortunately, insurers have had few tools available for managing their exposure for massive workers' compensation losses from a megacatastrophe event.

And unlike property insurance, the workers' comp line does not have a history of catastrophe exposure management for disasters. It is also difficult to quantify exposure for the line because individual states mandate the benefits and prohibit the use of exclusions for catastrophes and terrorism on workers' compensation policies.

In recent years, however, some insurers have tried to get a better picture of their true risk by looking at exposure data on all their accounts. Across their portfolios, they are reviewing every site where covered employees are located and considering factors such as each location's geographical and geological characteristics, building construction, quality of local emergency response mechanisms, concentration of employees at each site, makeup of the employee population (salary, occupations), and typical work patterns (arrival, lunch and departure times; day shift versus night shift).

Some carriers have started using Sanborn maps (large-scale maps of more than 12,000 U.S. towns and cities) for underwriting purposes to estimate the potential risk for urban structures and get a visualization of an entire coverage area.

The maps include detailed information such as building outlines; size, shape and height of buildings; construction materials; function of structures; location of windows and doors; fire-suppression capabilities; and strength of local fire and emergency response departments.

Other carriers have developed or purchased computer modeling systems that estimate insured loss under workers' compensation, property and business-interruption insurance policies from a wide range of catastrophe scenarios. Some models even estimate the likelihood of potential losses.

Using the model output, an insurer can set guidelines as to how much accumulated exposure is acceptable for single events and compare current portfolios with the guidelines.

THE LIMITS OF MODELING

One limitation at this point in the development of models for workers' compensation is that models require exposure data at a level of detail--such as number of employees, location and off-site employees--most companies don't capture or retain through traditional underwriting.

Models are built to handle high-volume data and thousands of data elements with accuracy and efficiency. The more data collected for the relevant predictors, the more accurate the predictions. So getting a clearer picture of an insurer's overall workers' comp risk starts with improved data collection.

Collecting data in a common transactional format holds the key. Insurers can add fields for inclusion of any number of data sets and can extract the data for analysis. By collecting a wider range of data from each claim, insurers will develop a more credible, robust database from which the models can more precisely predict expected losses based on exposures to all types of catastrophe events.

Knowing the extent and concentration of their workers comp' exposures will help insurers plan a sound risk management and business strategy, no matter what catastrophe strikes.

November 1, 2008

Copyright 2008© LRP Publications