Expert Commentary

As the Workers Compensation World Turns

The acts of September 11 have led to new underwriting exposures and concerns. The impact on workers compensation rating, risk retention, coverage, and the market is addressed.


Workers Compensation Issues
April 2002

As the 6-month anniversary of the catastrophic events of September 11, 2001, passes, it is evident that repercussions from those events continue to impact on the workers compensation system and its marketplace. The ripples that affect most aspects of workers compensation seem to be especially felt in the parts of the compensation system relating to insurance coverage and, as a result, to its marketplace.

Underwriting Issues

The acts of September 11 have led to new underwriting exposures and concerns. This is being driven in part by the fact that no workers compensation act excludes injuries resulting from terrorism. Unlike other commercial lines where exclusions have been proposed, none are in the offing for workers compensation. The state of Minnesota has taken it one step further by issuing a memo through its Department of Commerce stating that terrorism exclusions for workers compensation products would not be approved.

Since the terrorism exposure cannot be limited, there is concern for the first time among underwriters about the concentration of an insured's workforce in a single location, especially high-rise buildings in large urban areas. Insurers have begun to decline writing coverage for employers heavily concentrated in urban areas whose workforce is largely composed of white-collar workers. This type of employer has traditionally been a low-premium and exposure risk. It has gone from being one of the easiest workers compensation accounts to place to one of the most problematic.

Impact on Rating

As discussed in The Continuing Impact of September 11 on Workers Compensation, the exclusion of the losses resulting from September 11 from the experience rating of those employers affected has been universally accepted. Another area of workers compensation rating that can be significantly influenced by these losses involves the loss cost factors developed for the states where the losses have been paid. NCCI in its Item Filing B-1377 proposed that a 4 percent rate increase be applied to loss costs/rates for all workers compensation class codes as a provision for catastrophes.

At this point, the filing has been disapproved in the following states: Alaska, Alabama, Arizona, Colorado, Connecticut, Iowa, Illinois, Kansas, Kentucky, Maine, Missouri, Montana, Nebraska, New Hampshire, New Mexico, Nevada, Rhode Island, South Dakota, Vermont, and Virginia. It has been withdrawn in Oregon and is not applicable in Indiana, Minnesota, North Carolina, and Wisconsin. No action on this filing has been taken in the following jurisdictions: Arkansas, District of Columbia, Florida, Georgia, Idaho, Louisiana, Maryland, Mississippi, Oklahoma, South Carolina, Tennessee, and Utah.

Risk Retention Decisions

With the pricing of workers compensation coverage escalating, more entities are considering risk retention options. Deductibles are one alternative an employer may choose or—in this market—may have chosen for it by the insurer. Another risk retention option that has been popular in previous hard markets is self-insurance. See The Workers Compensation Self-Insurance Decision for more specific information about how to evaluate this option.

In the current hard market, employers considering this option find themselves in a Catch-22. The majority of states that allow self-insurance also require excess workers compensation insurance. In the aftermath of September 11, this line of coverage has become pricey and difficult to find.

Another retention option being considered by entities is the provision of coverage through fronted arrangements using either individual or group captives. This risk retention mechanism has gained appeal as an alternative to self-insurance since excess workers compensation insurance has become problematic to find. See Captives 101: What Are They, and Why Do I Want One? by Michael R. Mead, CPCU to read more on this topic.

Coverage Concerns

As we reported here several months ago, there has been some concern whether the language contained in the various workers compensation acts is broad enough to encompass within its scope of coverage the type of losses that occurred on September 11. The first state to take action was Illinois where HB 3658 was introduced in an attempt to afford coverage for a worker injured by a neutral force while at the job site. This legislation appears stalled in committee.

Another state to take action is Indiana. Its SB 71 would provide workers compensation benefits for an employee killed or injured by a terrorist attack while going to or coming from the place of employment or in the course of carrying out the duties of employment. This bill is currently still in committee.

The Current Marketplace

The workers compensation market that was already hardening before September 11, 2001, continues to reel. Premium increases of 50 percent and more are not uncommon. Capacity has also continued to diminish. There is some hope that some of the new players coming out of Bermuda will show interest in writing workers compensation coverage at more competitive pricing since they are not encumbered by either a book of business whose loss ratio was deteriorating prior to September 11 or losses stemming from the events of September 11.

Entities and their brokers would be well served to prepare renewal submissions as early as possible. The submissions must be complete and concise, allowing the underwriter to quickly digest the type of risk being reviewed. One new feature that entities in high-rise buildings should consider adding to their submissions are details of the evacuation plans in place. This information would help with the underwriter's concern over a high concentration of employees in one building. When an underwriter is flooded with submissions, those that receive attention are those that are thorough, easy to follow, and received well in advance of the renewal date.


Note: See other terrorism articles on IRMI.com.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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