Large-deductible work comp

A key to weathering the next market cycle

By Michael J. Moody, MBA, ARM

Across the property/casualty marketplace, there are now strong signs of an upward shift in pricing. While increases in some lines are being held in check because of the difficult economy and the resulting reduced exposure base, rate hikes in other lines can no longer be put off.

Such is the case with workers compensation, which frequently is one of the first lines to experience rate increases. Overall results for workers compensation are concerning, but because premiums for this line are based on state rates, some states are in much more perilous condition than others.

A concept that was introduced during the last hard market over a decade ago may offer hope for some employers. The concept—large-deductible workers compensation programs—has gained popularity ever since. According to Gus Aivaliotis, vice president of large casualty for Safety National Casualty Corporation, a key reason for the success of large-deductible programs is that "companies can obtain many of the financial advantages of self-insurance, without the administrative burden that may accompany self-insured programs." Safety National was among the first carriers to introduce the large-deductible concept, and Aivaliotis says, "It has become a very good product for us."

Since it was founded in 1942, Safety National has been a leader in the excess workers compensation market. For many years, excess work comp was the only line the insurer wrote, Aivaliotis says, "But over time we have tried to expand our product portfolio into other underserved areas." For example, several years ago the traditional bond market hardened and left many work comp self-insurers without any options for bonds, which many states require employers to obtain in order to gain and maintain self-insured status. To fill this gap, Safety National began to offer self-insured bonds to its excess work comp customers.

Although Safety National had achieved notable success in the self-insured work comp area, Aivaliotis explains, the insurer began to notice some movement away from self-insurance during the soft market. To maintain volume, Safety National created a large-deductible workers compensation program.

Although deductibles had long been used in property and auto physical damage coverages, Aivaliotis notes that, historically, "Deductibles have not been of sufficient size to be financially meaningful." Despite this, he says, "They did in fact eliminate a lot of minor expenses associated with nuisance-type claims."

As the deductible concept gained acceptance in workers compensation, Aivaliotis observes, "It came in the form of a meaningful deductible amount with an equivalent offset of a meaningful premium deductible." As a result, he explains, the insurance buyer can maintain many of the financial advantages of self-insurance while it "transfers much of the administrative burden to the insurance carrier."

Most buyers of large-deductible work comp programs have chosen to self-fund the deductible. Recently, however, some employers have begun using a captive insurer to fund the deductible. Currently, Aivaliotis says, "The majority of the accounts we look at are not using a captive." He adds, "The decision to use a captive varies widely based on the nature and goals of the buyer. For the right buyer, who understands the captive structure and is comfortable with it, it can be a terrific vehicle." As more corporate buyers begin to see the strategic value of a captive, this trend can be expected to grow.

Opportunities abound

As noted earlier, rates are firming in the property/casualty market, and this trend is likely to continue through 2012. And as often happens, the shift is being led by increases in the workers compensation sector in some states.

According to Aivaliotis, "As the guaranteed cost market begins to firm, we anticipate that some of those accounts that gravitated away from retention and deductible programs will move back." Although guaranteed cost programs had become very competitive, he notes, the pricing could not be sustained. As a result, "We anticipate significant activity as the market hardens."

Although that is good news for Safety National, what does it mean for the mid-sized retail agency or brokerage?

Aivaliotis observes that mid-sized retailers may have difficulty gaining access to large casualty insurers because of their minimum volume requirements. Even with the market hardening, "Unless you are a broker of sufficient size, you may be precluded from some potential markets," he says.

At Safety National, he says, "We actually are what I consider an 'open brokerage' firm. If there is an opportunity for us, we are always open to talking about new accounts." What's more, he points out, "We don't require traditional agency contracts, which typically contain some type of volume commitment."

Safety National has an active marketing department of 15 business development professionals, most of whom are located in major metropolitan areas. The insurer has developed a specific, sustainable approach to the commercial liability business, and it expects mid-sized retailers to play a key part in its growth plans.

Leading the way

It again appears that workers compensation will lead the current market hardening. As a result, many commercial insurance buyers will be seeking alternatives to their current guaranteed cost coverage. Safety National has several options that retailers and their clients may want to consider.

For many years, the insurer has been a strong advocate of self-insurance. Because of the administrative burden, self-insurance may not be the most appropriate option for some large accounts, so Safety National introduced its large-deductible work comp program. To maintain its competitive position, the insurer added general liability and auto liability coverages to its large-deductible options. The three lines of coverage can be purchased as a package program, or the large-deductible work comp coverage can be selected on a monoline basis.

Aivaliotis emphasizes that Safety National believes that middle market business will continue to account for a significant portion of its volume. Bottom line, Aivaliotis says, "We remain committed to the independent agency system and encourage mid-sized brokers to learn about our array of competitive products."

For more information:

Safety National Casualty Corp.

Web site: www.safetynational.com