A group of companies that band together to self-insure their workers' compensation obligations on a mutual joint-and-several basis are referred to as "self insured funds". These funds are required by statute in every state to purchase excess workers' compensation insurance for protection from large losses. This ensures that the medical bills and lost wages arising from catastrophic work-related injuries to employees will be paid. Until recently, buyers for this type of insurance enjoyed a market with lots of competition, low minimum premiums, and low per-occurrence retentions.
Over the last twelve months the market for excess insurance has changed dramatically. Minimum premiums and per-occurrence retentions are increasing for everyone. This puts a strain on the assets of funds due to higher cost and retention of more loss volatility.
Why has the market changed so dramatically?
1. The number of insurance companies writing excess workers' compensation insurance has declined dramatically. In the past there were almost a dozen players in the market. Today there are only about five or six.
2. Medical cost inflation is still growing at a higher rate than the inflation rate of the overall economy. Higher medical costs mean more claims are exceeding the old per-occurrence retentions and costing the excess insurers big bucks.
3. Excess insurers are more selective in the class codes and industries that they will insure. Temporary staffing companies, certain contractor classes and trucking companies are finding it difficult to obtain excess insurance.
4. Less competition means higher premiums and more restrictive policy terms and conditions.
While these changes have created problems for buyers in this market, some of these changes were inevitable. Excess insurers prefer to pay large losses that occur infrequently rather than many smaller losses. By not increasing per occurrence retentions in step with the increase in medical expenses, they saw an increase in loss frequency that became unacceptable over time. Excess insurers ended up picking up most of the medical cost inflation.
As difficult as these market changes are for self insured fund buyers, there are options to consider. One option is to buy what is known as a buffer excess layer which sits below the per occurrence retention of the excess workers' compensation insurance policy. Buffer layer coverage is readily available in the reinsurance market, which is better equipped to assume the frequency and volatility of losses that the excess insurers do not want. Not many fund managers know about this option because the retail broker handling their excess insurance placement often is unfamiliar with what is available in the reinsurance market.
With the purchase of a buffer excess layer, self insured funds get more control of the amount of loss they retain.