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The excess workers' comp marketplace is likely to see "tolerable" increases in premiums in 2005. Those increases, however, could quickly skyrocket because of medical inflation, brokers and underwriters say.

"In general the excess market is still tolerable for the majority of accounts," says Duke Niedringhaus, vice president of alternative risk with the excess workers' comp broker J.W. Terrill.

Renewals in this market, will be "somewhere between flat and 8 percent to 10 percent," says G. Thomas Dutmers, chief operating officer of Wexford Underwriting Managers Inc.

But it's still hardly a time for buyers to breathe a sigh of relief. The industry's 900-pound gorilla, medical inflation, and pounding on the industry's door with double-digit price increases, the brokers and underwriters say.

"Prices these days are solely related to medical inflation," says Steven J. Link, executive vice president of Midwest Employers Casualty Co. Medical procedures performed just a few years ago were less reliant on technology and thus cheaper.

Or, take spinal cord injuries for example. "There will be a treatment in the next several years," Link says. "None of us have reserves for that event."

As a result, catastrophic medical care cases that cost insurers $180,000 annually today, will rise to $300,000 a year 10 years from now. "That medical inflation, that's the cost that we bear," says Link.

The bulk--about 70 percent--of every dollar paid in excess workers' comp claims is driven by medical costs, compared with claims paid for by primary workers' comp carriers where the medical costs make up closer to 50 percent of the claim.

"Obviously, if you are taking 70 cents on the dollar being medical and that's clipping away at 8 percent growth each year, that certainly creates some issues," says Niedringhaus.

Despite a tolerable renewal season, Niedringhaus says he's seen his fair share of nasty surprises. One 2005 renewal, for example, was a rate increase of 20 percent. Another came in at 25 percent.

Above certain layers, Niedringhaus adds, there's little capacity.

"It pays to shop around to see which one of us has a better appetite for a particular risk," says Wilhelm. "Jan. 1 renewals will be flat to modest. But beyond Jan. 1, if TRIA doesn't get renewed, as of Dec. 31, 2005, that expires. Any policy starting in February will have a month of it not covered by TRIA so some of us might have some exposures for a month in New York or Miami or Washington," says Wilhelm.

In terms of general liability, "overall rates are still pretty strong and there's still a large amount of underwriting that's still evident in the market," says Scott Bayer, senior vice president of general liability for Liberty International Underwriters.

He says he's seen decreases in the owners, landlords and tenants side of the real estate business. Increases, however, have hit the construction side. "I think the thing that everyone's going to watch probably is where rates go from here," he says. "Are we in a market that is a stable market where you can continue as is and the rates remain adequate, or are we in a softening market that requires a little different marketing approach or a little more research on the products we're offering."

"That's the biggest thing people are going to watch," he says, "to see how the current carriers that are in the market--the larger players--are going to respond to the market cycle. Are they going to start chasing some rates or are they going to stand firm and maintain what they have. My hope is that people stand firm and retain their underwriting discipline."

Carriers that ignore underwriting discipline will pay dearly, says Kevin H. Kelley, CEO of Lexington Insurance Co. He says his company is even "prepared to let business go," if it can't find satisfactory rates and terms. "If rates and terms aren't in the market, we'll focus on other things," he says.

In order to maintain stable and healthy balance sheets, Bayer also says, companies are looking to develop a diversified portfolio to protect themselves from drastic swings in the marketplace.

"I think we've seen in the last couple of years carriers making a really concerted effort to spread their book of business, whether it's by class or by geographic territory, so that when the market cycles do turn or do change dramatically, they can maybe not be immune to it, but maybe soften it as much as possible," he says.

A RAFT OF NEW PLAYERS

Carriers best positioned to take advantage of changes in the market are AIG's Lexington Insurance Co. unit, Nationwide's Scottsdale Insurance Co., and Markel Corp.'s Evanston Insurance Co. and Essex Insurance Co. units, according to A.M Best & Co.

These companies, says Best in its 2004 market review, provide extensive underwriting expertise "across a diverse selection of products in multiple market segments." The companies are often part of a larger group--Lexington being part of AIG, for example--that is very well-capitalized.

AIG and its related companies, and Lloyd's control 48.1 percent of the total U.S. excess and surplus lines market, a statistic not likely to change in 2005.

"Consistent with historical trends, the larger, most established carriers increasingly dominate the surplus lines market, with the 25 leading surplus lines groups commanding almost 85 percent of the total U.S. excess and surplus lines market," the report said.

Of the top 25 surplus lines companies operating in 1993, 10 still remain the same. While established players have been able to build a reliable base of clients, new blood has entered the marketplace. The new companies could eventually pose a challenge to the old guard.

Competition from Quanta, Aspen Specialty, Arch Specialty, James River Insurance Co., and Maxum Indemnity Co. is "likely to compress future profit margins by selectively competing on those extremely attractive accounts," the report also said.

Lloyd's, which generates the bulk of its U.S. revenues from surplus lines and reinsurance, is expected to remain a market leader, according to the report.

CYRIL TUOHY is managing editor of Risk & Insurance®.

January 1, 2005

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