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19 May 2008. Workers Comp Cat Covers CARe Meeting Cambridge, MA. Paul Silberbush, FCAS, MAAA. Outline. Basics of Coverage Clauses/Exclusions Data Requirements for Reinsurers Exposure Accumulation Pricing Examples State of the Market. Basics of Coverage.
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19 May 2008 Workers Comp Cat CoversCARe MeetingCambridge, MA Paul Silberbush, FCAS, MAAA
Outline • Basics of Coverage • Clauses/Exclusions • Data Requirements for Reinsurers • Exposure Accumulation • Pricing Examples • State of the Market
Basics of Coverage • A Workers Comp Cat is an occurrence affecting 2 or more lives (claimants) • A construction crane collapses and kills 6 workers • An explosion at a chemical factory injures hundreds • A $10m lifetime medical claim for a single person is NOT a WC Cat • Perils • Earthquake • Terrorism • Industrial Accidents (Fire, Explosion etc) • Workplace violence (e.g. Shooting)
Typical Workers Comp Cat Cover • Excess of Loss • MAOL: “Maximum Any One Life” • Most any single risk can contribute to subject loss • Important pricing factor (higher MAOL, higher price) • One paid reinstatement • Terrorism • One limit of full coverage ex-NBCR is usually included • May depend on location (e.g. New York or Chicago) • NBCR available at extra cost (e.g. 3-6% additional ROL)
Typical Exclusions/Clauses • Occupational Disease/Cumulative Trauma • Limited to sudden and accidental over 72 hours • Industrial accident releases chemicals which cause illness over time • Cover not designed for latent exposures • Chemicals in work environment cause illness over time • Gives short reporting tail (but usual WC long-tail otherwise) • Usual reinsurance exclusions (Assumed Re, Pools, War, etc) • Jones Act • USL&H unless incidental • Employers Liability • Sunset clause – all losses reported within 7 years of expiry • Commutation (but many have no real substance)
Reinsurer Data Requirements • Premium • Exposure Detail • Both for qualitative assessment and to run cat models • Payroll/Premium by zip code (or street address) • Premium by industry class codes • Hazard group and state mix • 10 largest accounts by payroll, premium, employee count • Loss history (multiclaimant detail is needed to be of use) • Triangles, loss ratios, rate level history etc not usually needed
Exposure Accumulations (Reinsurers) • Within a single cedant • Single large insureds (factories, etc) • Several or many insureds nearby • Single large office building • Dense business part of major city (e.g. Wall Street or Midtown) • Over many cedants • Reinsurer XYZ writes cat covers on companies A,B,C • A,B,C collectively insure several large firms in same building • Or, A,B,C write layered policies on same large firm • More common in excess casualty or D&O • Reinsurers track aggregates of these types in varying degrees of detail
Exposure Accumulations (Reinsurers) • “Unknown Exposures” • Large groups of employees of one or several firms out of office • Company meetings • Air travel • Tradeshow Example • Sony, Nokia, Motorola send large contingents to consumer electronics show in Las Vegas • Insurer ABC writes WC on all 3 and is reinsured by XYZ • Las Vegas a terrorist target • How to track this? • Some accumulation models take largest tradeshows into account
Factors Impacting Workers Comp Cat Reinsurance Pricing • Portfolio Size (Subject Premium) • Size impacts ROLs due to capacity charges • Combination of MAOL and Attachment • Geographical Split • Natural hazard • California, New Madrid Subject Premium • Urban accumulation • Terrorism probabilistic somewhat used by some reinsurers • Terrorism - City targets vs. Employee Count accumulation densities • SIC / Hazard Group Profiles
Workers Comp Cat PricingExamples • Example 1 • Regional (Midwest) mutual • $300m WC premium • NM EQ exposure; limited CA EQ exposure • Some Chicago exposure • $10m xs $5m, 2 paid reinstatements, $3m MAOL, Terror ex-NBCR • 6.75% ROL • Example 2 • Large national stock company • $1b+ WC premium • Exposure in most states, including major cities • $25m xs $25m, 1 paid reinstatement, $10m MAOL, Terror ex-NBCR • 9% ROL
Workers Comp Cat PricingEarthquake EP Curve (Example 1) Layer attaches Layer exhausts
Workers Comp Cat PricingTerrorism EP Curve (Example 1) Layer attaches Layer exhausts
Workers Comp Cat Reinsurance Market • Capacity is greater than pre-9/11 levels ($800m+) • Bermuda continues to lead terms and capacity • A&H capacity remains less than $50M • Security and rating issues prevent from being placed • Continued Price Softening • 2005-6 experienced 5-10% reductions • 2006-7 experienced 10-15 % decreases in rates on line • 1/1/2008: 5-20% decreases in rate on line (limited sample) • Pricing and coverage driven by portfolio features • Detailed WC exposure data secures best terms
Workers Comp Cat Reinsurance Market • Improved Terrorism coverage • Including Domestic Terrorism coverage is standard • Ample coverage exists for TRIA exposures • Some programs have been structured as a stand-alone cover to coincide with TRIA legislation • Pricing for conventional attacks continues to improve • Increased capacity for NBCR perils; pricing remains expensive • Security remains the key issue
State of the Workers Comp Cat Reinsurance Market Near-Term Outlook • During the second quarter of 2007 the Property Cat market has demonstrated softening (and has continued through 1/1/08 and beyond) • Property decreases largely driven by lack of hurricanes • Rating agencies have increased scrutiny on carriers’ WC exposures from catastrophes (natural and man-made). • Will this translate into pressure to purchase additional catastrophe protection? • Will TRIA’s increasing carrier deductible and uncertainty regarding the program’s long-term viability lead to more reinsurance placements and additional NBCR capacity? • Recent events have caused some reinsurers to become concerned about a WC “mega-event” • frequency and severity of 2006 and 2005 hurricanes, 2004 tsunami, potential for flu pandemic, 1906 SF earthquake repeat). • To date, these concerns have not translated to increased pricing or coverage limitations
State of the Workers Comp Cat Reinsurance MarketJanuary 1, 2008 Renewals • Overall, cedants are increasing reinsurance retentions • Looking to save on overall spend in preparation for the inevitable loss in volume as primary pricing declines • Over many LOBs, not just Workers Comp • Catastrophe: • Capacity was readily available • ROL reductions up to 20%+ • Slight increase in available limits for terror cover • Some reinstatements were allowed for price considerations • Working Layers: • Price softening with decreases of 5% - 10% • Desire to increase retentions