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Troubled by Scarcity in the Land of Excess
The excess workers' comp insurance market looks to keep shrinking, battered by the soft primary market, healthcare reform and failures among self-insured groups.
By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance® Top CEOs in the excess workers' compensation insurance space estimate the market to be about $1 billion, which is less than it used to be.
Shrunk, and shrinking yet. The the reasons for contraction in the future will be the reasons for past contraction. A declining exposure base, mergers and acquisitions, irresponsible pricing in the primary market and fewer customers (particularly self-insured groups). As for the latter issue, the worst case has occurred in New York state, where as many as 15 self-insurance groups have gone insolvent, with a total deficit of up to $600 million. Lawmakers in Albany are clamoring to ban self-insured groups entirely. The same talk can be heard in Sacramento, Calif. Charles C. Caldwell, president and CEO of Midlands Management Corp. in Oklahoma City, Okla., didn't mince words, calling self-insured groups a "thing of the past" in those two states. In New York, primarily the problem has been mismanagement. "What a black mark on the self-insurance industry," said John Csik, CFO of St. Louis-based Safety National, a leading provide of alternative risk workers' comp products. In other instances, however, groups have been leaving the market entirely when they go belly-up because of cutthroat competition from the primary market, or when they decide to become mutual insurance carriers instead. It's "disheartening" to Caldwell to see groups going mutual or leaving the space in some other fashion--a shame because "group self-insurance actually runs quite well," Saunders agreed. Also, it's a shame because groups are consumers of excess insurance. "One of the big challenges we're facing is the pie is not growing," Csik said. PRIMARY DISFUNCTION Another problem for excess workers' comp carriers is that their situation is largely dictated to them by what happens in the primary market, which isn't entirely rational at the moment. A.M. Best Co. reported in early October that the combined ratio for workers' comp carriers was 111. That means for every $1 in premium it brings in, the industry loses 11 cents. The market probably is even worse in reality, according to Saunders, because, across all of the property/casualty space, we haven't seen booked ratios that show just how bad things currently are. "It seems like this industry as a whole doesn't learn much," Caldwell said. And it seems it won't be learning much, or changing its ways, in the next year or so, if you take as an indicator the dearth of optimism from this panel of CEOs, who spoke at the 30th annual meeting of the Self-Insurance Institute of America Inc. in Chicago in October. As if excess comp carriers didn't have enough to shake their heads at, they will also face potential damage caused by federal healthcare reform--or so they claim. Like in many industries, though, leaders in excess comp are short on words when it comes to the specifics. "We just assume it won't be good," Caldwell said. Still, by Csik's estimate, 25 percent of the U.S. workforce is under a self-insured workers' comp program. Another 25 percent work at employers with high-deductible programs. In either case, that's still a good bit of exposure for excess carriers to compete for. They might not be able to get the rate they need or want for this business, but excess carriers have ways to help improve their own combined ratios. "We have got to get better at pegging loss ratios," Saunders said, adding that organizations like hers need to have a "primary focus" on claims without a primary carrier's claims staff. Read more at the WorkersComp Forum homepage. October 19, 2010 Copyright 2010© LRP Publications |
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