Workers’ Comp Texas, A League of its Own

One of the many singular phenomena that sets Texas apart from the rest of the U.S. is the fact that it is the only state in the Union that does not require its employers to participate in the workers’ compensation system. Employers are encouraged to provide a workers’ comp program for their employees, and governmental entities and contractors must provide workers’ comp insurance, but beyond that, nothing is required.

According to a study recently released by the Research and Oversight Committee (ROC) on Workers’ Compensation, “Study of Nonsubscription to the Texas Workers’ Compensation System: 2001 Estimates,” some 35 percent of the state’s employers, representing approximately 16 percent of the Texas workforce, do not participate in the workers’ comp system. However, those numbers are substantially smaller than those found when the ROC, a state agency, first studied participation in 1993. At that time, 44 percent of Texas firms, employing about 20 percent of the workforce, were nonsubscribers.

The ROC attributed the drop in the overall nonsubscription rate since 1993 to a number of factors, including a mostly expanding economy between 1993 and 2001, in which thousands of new businesses and jobs were created, along with an extended period of declining workers’ comp rates.

The study results are based on a survey of 2,808 year-round Texas employers conducted between August and October 2001. At that time, with pressure being placed on the already hardening market by the events of Sept. 11, rising rates were an issue with respondents. Forty-two percent of participating employers reported increases in their workers’ comp premiums, with 38 percent of those stating that their premium costs increased less than 10 percent. About 33 percent of the employers who experienced rate increases indicated those rises were above 10 percent and another 29 percent had their premiums shoot up by less than 20 percent.

Given that the workers’ comp system is voluntary, it would seem that employer provisions for taking care of employees that are injured on the job might be the first to go in times of economic stress, and the study bears that out. Almost half of the employers subscribing to the system indicated they might drop coverage if they experience up to 20 percent increases in premium costs.

One way employers are being hit with higher workers’ comp costs is through the elimination of scheduled credits that carriers previously offered, according to Nancy Moore, TDI deputy commissioner for workers’ compensation. Carriers “didn’t give as great of scheduled credits in 2001 to companies as they have in the past,” Moore said, and some carriers “chose to eliminate some of those credits.” She added that the elimination of credits is likely to be an ongoing trend.

William Dalton, director of sales and marketing for Venture Programs, a West Chester, Pa., company that specializes in workers’ comp coverage in a number of areas, including country clubs, hospitality and technology, underscored Moore’s evaluation. “There’s been a diminishing amount of capacity… to some degree for workers’ compensation, Dalton said. “As such, if insurance carriers only have certain amounts of supply and capacity, they’re going to use it very wisely. And they’re going to use it for the risk where they are more certain to make money… And those accounts that were marginal, they’re not going to get the credits that they [received] in the past.”

Filings with the Texas Department of Insurance (TDI) by workers’ comp carriers support the employers’ reported rate experiences to a certain extent. According to TDI actuary J’ne Byckovski, in response to new rate relativities established by TDI, companies had to file to adopt these relativities effective Jan. 1, 2002. With their submissions, many companies also chose to revise their deviations and/or file for rate changes. Out of the 264 filings by workers’ comp carriers received by TDI in early 2002, 102 filed for increases, while only 5 filed for decreases. Companies that made submissions with no rate changes or just adopted the new relativities totaled 157. Byckovksi said the overall rate change for all carriers came to an increase of about 4.5 percent.

She noted that although companies must file actuarial justifications for the rates with their change requests, most simply indicate that their losses have increased or their expenses have increased, rather than state that they are raising rates due to particular circumstances—such as fallout from Sept. 11 or difficulties with reinsurance.

And reinsurance treaties will continue to put pressure on the market. Although most reinsurance policies came up for renewal on Jan. 1, others aren’t due to renew until later this year. Some industry observers, like Dalton, expect that rates will continue to rise and availability problems will increase as those contracts expire.

“One thing to keep in mind is that a lot of the reinsurance treaties for workers’ compensation are up in July,” Dalton said. “And insurers appetites for workers’ compensation and their interest in writing workers’ compensation are going to be key to workers’ comp costs in the second part of the year.”

Insurer of last resort, biggest market share
In 1991 the Texas Legislature chartered the Texas Workers’ Compensation Insurance Fund as the insurer of last resort for workers’ comp coverage in the state. The legislature revamped the program in 2000 and changed the name to Texas Mutual Insurance Company.

The fund, created as an independent insurer, wrote over $304.5 million in premium in 2000, commanding a 15.24 percent share of the market. Those numbers far outstrip its nearest competitor, Liberty Fire Mutual, which, with just over $79 million written premium for 2000, claimed only 3.95 percent of the market. Texas Mutual ended 2001 having written about 31,500 policies worth around $425 million in premiums.

Terry Frakes, senior vice president of public affairs for Texas Mutual, said the company’s purpose, according to the statute that created it, is “to provide affordable workers’ comp insurance and make sure that workers’ compensation insurance is available… And the third part of that is also to act as the insurer of last resort.” He indicated that in fact most of Texas Mutual’s insureds come to the company for reasons other than because it is the insurer of last resort. “Our residual market program is very, very small,” Frakes said. “I would think… probably less than two percent of our policyholders are in the residual market program.”

Frakes noted he’s heard, anecdotally, that “there seems to be a move on the part of many, let’s say, of our competitors, to constrict their writing to nonrenew many accounts and to not write a lot of new business. So I think that we have a lot of policyholders coming our way because they’re not being renewed by their present carrier. And, of course, I would add that our renewal rate is very high—somewhere between 75 and 80 percent. Which I think speaks well not only for our rates—that we’re competitive in our rate schedules—but also with our customer service that we provide.” He added that Texas Mutual writes 99 percent of its business through agents.

The number of policies written by Texas Mutual at the end of 2001 was not significantly greater than the number written in 2000, just under six percent for the year, according to numbers compiled by the Independent Insurance Agents of Texas (IIAT) on their Web site. However, while written policy counts for the fourth quarter of 2001 rose only 9 percent over 2000 figures, the average written premium per policy rose by a whopping 57 percent to $14,781 for the fourth quarter 2001, compared with $9,426 for the same period in 2000.

And interest in Texas Mutual continues to rise. Frakes said that in January of this year the company received roughly two-thirds more applications over the number received in January 2000. He estimated that increasing numbers of applications received and policies written by Texas Mutual may be related to a number of factors, including the demise last year of some of the companies that had been writing workers’ compensation insurance in Texas.

“Part of the increase in business that we’re seeing is a result of… there are three or four carriers that have been taken over by state regulators, the biggest one of course is Reliance,” Frakes said, adding that Fremont and Superior National were no longer writing workers’ comp. “Petrosurance has been taken over by the Oklahoma Commissioner, I understand… All of those write small amounts of business in the state, but you add it all up and it’s [significant]. So part of the increase in the number of submissions we’ve had are related to that.”

No terrorism reinsurance
Like other workers’ comp carriers, Texas Mutual has been hit by the difficulties in obtaining reinsurance for terrorism. “There is just no terrorism reinsurance that we’ve been able to find,” Frakes said. He speculated that, like Texas Mutual, other carriers are in the same boat and are simply “doing without” reinsurance.

“Here’s the problem for workers’ comp—in property, let’s say if you insure a building, you can exclude terrorism coverage as a carrier,” Frakes said. “You can just say to the employer, ‘I’m sorry I’m not going to provide that coverage.’ But in comp you can’t because comp is a state-mandated program and the coverages for workers’ comp are set by the state. So we as a comp carrier or any other comp carrier, can’t say we’re going to exclude terrorism coverage. We have to offer it.”

The lack of terrorism reinsurance and the fact that workers’ comp policies are required by state law to provide terrorism coverage is a double whammy, according to the National Association of Independent Insurers (NAII), which is lobbying hard for assistance with reinsurance on the federal level. The NAII’s position is that without the protection of reinsurance for terrorism, many companies may be forced to drop the coverage altogether.

“Without federal backstop legislation all insurers are facing the problem of reinsurance unavailability and smaller and medium-sized companies certainly face the same problems,” said Nancy Schroeder, NAII vice president for workers’ compensation, in a statement. “Some of the smaller and medium-sized companies may be hesitant to put their own surplus at risk.”

Schroeder added that in addition to the disappearance of terrorism reinsurance, another effect of the events of Sept. 11 on workers’ comp insurance is the emergence of new developments in assessing risks.

Before that date, stated Schroeder, “Most people thought of employees in factories or on construction sites as the most likely workforce to sustain injuries and therefore losses.” Since 9/11, however, “The major concern is about white-collar office workers in urban areas where a terrorist attack would have the greatest impact.”

That sentiment is echoed by Bo Gilbert, director of government affairs for the IIAT. In a January 2002 update on the workers’ comp market, Gilbert reported that, “Companies are concerned, since 9/11, with the number of employees in a single location. They now want to know the concentration of risk at individual locations and are refusing to underwrite risks if this concentration of workers is too high.”

Gilbert indicated that currently, availability of workers’ comp coverage is not a problem in Texas, but acknowledged that even agents with accounts with good loss history are reporting that those accounts are experiencing rate increases in the 20 percent range. He added that accounts with “marginal or poor loss history are seeing significantly higher increases.”

“The ability to obtain credits, or for companies to quote risks for less than their past year’s losses, is over,” Gilbert reported.

He also warned that since some reinsurance contracts haven’t expired yet, “critical availability/price increases have not yet occurred; but once these reinsurance contracts expire, availability problems and skyrocketing rate increases could occur.”

Concurring that rates are likely to continue going up Frakes said, “Those businesses that are in the most hazardous classification codes present the most problems, whether that’s crop dusting or nuclear waste haulers, roofers, construction folks—those types of businesses that are more inherently dangerous—present the biggest problems, not just for us but for any carrier.” He added that businesses that “are in the more hazardous classification codes have a harder time finding coverage. And finding what they may consider affordable coverage.”

In light of the difficult market, Gilbert said IIAT is advising agents to educate their customers in all lines of insurance, not just workers’ comp. He noted that policy holders, need to know what’s going on in the marketplace, the reasons behind the rate increases and what, if anything, they can do about the situation.

Nonsubscribers feel the squeeze
When a company chooses to participate in the workers’ compensation system in Texas, it gives up for its employees their ability to sue the company (in most cases) should they get injured on the job. In general, nonsubscribing companies lose that protection and may be sued by their employees for damages based on negligence. The ROC study found that 56 percent of those employers not participating in the workers’ comp system provide some sort of medical and income benefits, or wage replacement benefits, for their employees who suffer from work-related injuries or illnesses. Larger firms—those with 100 employees or more, which represent 80 percent of the workforce employed by nonsubscribing companies, are the most likely to provide such occupational benefits. And many of those companies that do provide wage replacement benefits require their employees to sign waivers stating that they won’t sue if they are hurt or become ill as a result of working where they do.

Employers that provide alternative plans are also feeling the squeeze in terms of pricing and availability of coverage. In his market update, Gilbert stated: “In the non-subscriber insurance market, providers of those plans said they are seeing rate increases of 40-50% with another 5-10% increases each month. These rate increases are occurring because they can get the rate as a result of workers’ compensation insurance rate increases, not because of non-subscriber losses.”

According to the ROC study, larger firms are more likely to have seen premium increases in 2001. It noted that the increased premiums are “likely the result of carriers cutting the scheduled credits previously offered to policyholders, less negotiation of experience modifiers, and perhaps increases in rates filed by some insurance companies.”

Hanging in there
While the workers’ comp area is getting tougher, there hasn’t been a mass exodus of carriers from the market so far. “If companies were going the to leave the market they’d have to file withdrawal plans,” TDI’s Moore said, adding that as far as she knows none have filed such plans. Moore acknowledged that some carriers are currently not writing workers’ comp, but they are companies that are in “various stages of financial difficulties,” like Reliance. Otherwise, she hasn’t seen companies backing out that aren’t already experiencing overall financial strain.

Like Moore, Gilbert hasn’t seen any providers exiting the market. “I know of a couple of companies that are looking into the market—thinking about jumping into it,” Gilbert said. He speculated that this might be an appropriate time to enter the market since if the company “prices correctly, it can do well.”

Topics Catastrophe Carriers Texas Claims Workers' Compensation Reinsurance