Workers Comp Insurance Markets Likely Hardening
The Hardening of Insurance Markets occurred for Workers Comp recently. The old soft market is no longer with us. I was very surprised that it took this long for the market to harden.
This includes Workers Comp insurance and all other insurance coverages.
In the last two years, the insurance markets have seen:
- An increase in catastrophe losses
- Collapse of liquidity
- Disappearance of excess capital
- Quite a few major insurers are in trouble due to catastrophic investment losses – AIG being the most notable.
All of the “dark clouds” have resulted in the demand for highly rated, secure insurers being greater than the supply.
The insurance companies need to raise rates to refill their bank accounts. With the economy in place, insurance carriers have not and cannot institute any type of alternative types of insurance or coverages. Risk financing is not a viable option, as the capital markets have dried up for the most part.
What may be the start of the perfect storm for insurance carriers and employers? Many companies will seek to offset the effect of higher insurance rates by taking larger retentions, either by self-insuring or placing more risks in a captive. Any move to increase retentions will be one of desperation rather than careful analysis.
Unfortunately, some of these companies increasing their retentions will find themselves incurring greater losses that they cannot afford. Of course, with a professional risk management program in place to minimize and prevent losses, companies might escape unharmed.
The next part of the perfect storm is that increasing retentions is a great way to release internal capital. The other side of the coin is that these same companies will cut their risk management staff to the bone. In my opinion, risk managers are needed now more than when the insurance markets soften. When there is so much money at risk, who better to watch over the risks than a qualified risk manager?
The final part of the perfect storm is when the employers turn all of their risk management programs over to a broker. This may work in some situations, but as I have said often, the employer and their staff understand their business much more precisely than any outside party.
Many employers that have experienced skyrocketing Workers Compensation costs and wish to find an alternative way to cover all of their insurance risks after letting their broker administer their risk management functions have recently contacted us.
I estimate the hard market will be in place very long-term, as there are so many parts of the “Perfect Storm” for risk management that are already in place.
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