NCCI, the insurance industry rating organization that manages many residual market pools, reported on industry results for the 2004 year. NCCI warns of potential market disruptions in workers compensation markets if the federal Terrorism Risk Insurance Act (TRIA) is not renewed. Volumes in the residual markets are at levels high enough to trouble NCCI and workers comp observers who remember the self-perpetuating "spiral" of depopulation caused by high "residual market loads" ("RML") not too many years ago. NCCI State of the Line Report: Workers' Comp Combined Ratio Best Since 1997
Studies by Tillinghast and Risk Management Systems, among others, support these concerns. (read more)
I’ve explored some possible sources for economic analyses of “super-cats.” One of the more helpful I found is “Managing Risk in the Aftermath of the World Trade Center Catastrophe,” (2002) published by Risk Management Solutions.
Its authors discuss various “supercats,” both natural and man-made, and issues of trying to value their impact. The RMS Publications site also contains dozens more papers related to the issues of valuation of catastrophes (they sell software for putting a number on a particular company’s exposure). It’s a wealth of reading about terrorism risk.
Another article links to two more detailed studies of workers comp exposures in a terror attack, and discusses possible market disruptions in workers comp if TRIA is not extended. One of them is a Towers Perrin / Tillinghast study that sees a potential $90 billion workers compensation industry loss in a worst-case scenario. RMS studies reportedly found potential for $4 billion from a major truck bomb attack and $32 billion from a large-scale anthrax attack. The total capital in the workers comp market is said to be about $30 billion, and NCCI just reported about $45 billion in premiums for 2004, so these would be major hits.
These impacts would be greatest on insurers that write large to medium size businesses with concentrations of workers in target areas. Terror risk and injury and disease arising out of and in the course of employment cannot be excluded from workers comp policies. The only way individual insurers may be able to mitigate their exposure is to not write policies on companies with high potential for such losses.
If that is the rational and common response, there may be insufficient companies ready to make a "voluntary" market for workers comp exposures in cities that might be a target for an attack, especially a radiological, chemical or biological attack. Some speculate that if TRIA is not extended, the anticipation of this might cause a crisis in workers compensation insurance as employers with urban concentrations are non-renewed and left to get comp insurance from the residual market or assigned risk plans.
This could lead to a self-perpetuating spiral exit out of voluntary markets as the remaining insurers seek to avoid having to pay the retroactive "residual market loads" that would be assessed on voluntary writers to pay the operating deficits from residual markets that would result from a devastating terror attack. Similar spirals have caused extraordinary market disruptions in the past.
The article, with links to more detailed studies, is at International Risk Management Institute, "TRIA's Sunset: The Dawn of a New Workers Compensation Crisis?" (May 2004).
The studies to which that article links are long; Towers Perrin study is 88 pages and an RMS study seems to be even longer (I've not yet read either myself). There is an executive summary of the Towers Perrin study available.
Posted by dougsimpson at May 6, 2005 03:10 PM