National Council on Compensation Insurance Issues Public Comment to DOT

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WASHINGTON, May 23 -- Timothy L. Tucker, Washington affairs executive at the National Council on Compensation Insurance, has issued a public comment to the U.S. Department of the Treasury. The comment was written and posted on May 16, 2022:

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To: Federal Insurance Office, Attn: Richard Ifft, Room 1410 MT, Department of Treasury, 1500 Pennsylvania Ave. NW, Washington, DC 20220

Re: 2022 Effectiveness Report

Dear Mr. Ifft:

The National Council on Compensation Insurance (NCCI) offers the following comments in response to the U.S. Department of Treasury's request for comments published in the Federal Register on March 30, 2022 with regard to the Federal Insurance Office's (FIO) forthcoming report on the Terrorism Risk Insurance Program (TRIP). NCCI's comments focus on the request for insights on the impact of TRIP on the workers compensation line of insurance generally, and specifically on residual markets, modeling for terrorism losses and data collection and analysis.

Founded in 1923, the mission of NCCI is to foster a healthy workers compensation system. In support of this mission, NCCI gathers data, analyzes industry trends, and provides objective insurance rate and loss cost recommendations. NCCI is the nation's largest workers compensation statistical agent and rating organization providing services to 37 states and the District of Columbia.

Background on Workers Compensation and the Terrorism Peril

The impact of acts of terrorism is unique to workers compensation insurance vis a vis other lines of insurance. The Terrorism Risk Insurance Act (TRIA) of 2002, and subsequent extensions, requires insurance companies to offer coverage for acts of terrorism in commercial lines covered by the Act. There are no exclusions for acts of terrorism in workers compensation insurance policies, including for incidents related to nuclear, biological, chemical, or radiological (NBCR) terrorism or "acts of war."/1

Workers compensation insurance coverage is statutorily required in all states, except Texas. Its purpose is to provide wage replacement and medical benefits for employees who are injured in the course and scope of their employment. Coverage also provides death benefits to surviving spouses and dependents of workers who die in a work-related accident. In many states, employers choose between buying workers compensation insurance in the voluntary market, the residual market or by self-insuring.

A significant challenge for writers of workers compensation coverage is the uncertainty of the frequency and severity of terrorist attacks, coupled with the inability to exclude any specific peril. Accordingly, carrier insolvencies could result in the case of a significant attack. While an insolvent carrier's claims could be covered by a state guaranty fund, guaranty funds operate on a state-by-state basis and cover only the risks written in their respective states. Moreover, the benefit levels paid by each guaranty fund also varies state-by-state; thus, there is no uniformity in the amounts available in the event of the injury or death of a worker.

Workers Compensation Insurance Premium in 2021

Countrywide, net written premium increased by one (1) percent in 2021. While strong employment and significant wage growth are fueling increases in WC payrolls, state-approved rate/loss costs served as a moderating factor on the premium increase in 2021.

Residual Market Impacts

The "residual market" is an insurance plan created by state law to ensure that workers compensation coverage is available to employers who cannot obtain such coverage in the "voluntary" market. All the workers compensation insurance companies that write insurance in a state with a residual market are required to participate in the plan based upon their share of the voluntary market.

For example, if Company "A" has a nine (9) percent voluntary market share in a state, then it is mandated to have nine (9) percent of the residual market as well. Therefore, the higher the company's percentage of the voluntary market in that state, the higher their percentage of the residual market that it must cover.

It is instructive to examine the impact that terrorism exposure could have on the residual market in the absence of TRIP. For example, consider residual market activity between the time of the September 11, 2001, terrorist attacks and the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA). During calendar year 2002, for NCCI-administered residual market plans and state plans...

1 The Commonwealth of Pennsylvania excludes from workers compensation coverage injuries or deaths from some war-related activities.

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...reinsured through the National Workers Compensation Reinsurance Pool (currently known as the National Workers Compensation Reinsurance Association NFP) administered by NCCI, the number of residual market policies increased by 39 percent (a large number for the residual market for onetime period) which represented a 70 percent increase in the premium dollar amount.

It is possible that the residual market growth would have been even greater had the insurance industry not known that a terrorism "backstop" was being considered by Congress during this year. As evidenced by the relationship of the premium growth to the policy count, the average premium size of such policies being placed in the residual market also increased. This was due to the employers, who had larger concentrations of employees, being unable to find voluntary market coverage.

As additional evidence of the problems employers faced getting workers compensation coverage in the immediate aftermath of the September 11th attacks, "high profile" insureds that entered the residual market included the Washington Post, National Geographic, the Kennedy Center, and the British Embassy (all in the District of Columbia). There was a noticeable concentration of residual market risks in some large cities as carriers in the voluntary market tightened their underwriting standards. Despite individual carrier's underwriting decisions, they continued to have exposure through the reinsurance pooling mechanisms which they were mandated to participate by virtue of having voluntary market share. These concentrations of risks eased in subsequent years as TRIP provided certainty to the total risk faced by workers compensation carriers related to foreign terrorist events.

In the eighteen years since the first enactment of TRIA, these same residual markets have had a cumulative decrease in policy volume of 25 percent (as opposed to the 39 percent increase of 2002) and a cumulative 34 percent premium decrease (as compared to 70 percent increase in 2002). Possibly more indicative of the impact of TRIA is the comparison residual market shares of total premium. In 2001, the residual market share of total workers compensation was approximately 5 percent, and it increased to over 10 percent in 2002. Following the enactment of TRIA, this market share has decreased significantly and has remained stable in the 4-6 percent range in the years 20072021.

Given the difference between the residual market policy numbers and premium growth pre- and post-TRIA, it is likely that the elimination of TRIP or exclusion of coverage of nuclear, biological, chemical or radiological (NBCR) acts would cause the residual market again to significantly expand beyond its current manageable market share of approximately 6 percent.

Terrorism Modeling

The existence of TRIP has an impact on the catastrophe models the NCCI relies upon to determine potential insured losses from a specific type of terrorism attack. The result of these modeling exercises has a direct impact on the portion of premium carriers ultimately charge for the terrorism peril. NCCI relies on catastrophe modeling firms to determine the potential impact of large-scale terrorist attacks on workers compensation. Since TRIA's inception, NCCI has contracted on three occasions with leading firms. These firms adapted existing modeling techniques to assess the impact of terrorism threats to workers compensation insurance.

The models developed for NCCI provide an estimate of the risk to workers compensation insurers due to potential terrorist events. The types of terrorist events selected were those that could cause large numbers of injuries and casualties, and therefore, catastrophic loss to insurers. Extensive simulations of terrorist events were done using insurers' exposure data, including estimating the frequency of a terrorist event. The resulting casualties and consequent losses were combined to estimate the total risk to the insurers. It is important to note that the impact of the terrorism "backstop" was estimated to calculate a final loss cost by state.

Data Collection and Analysis

NCCI has served as the primary organization to collect, validate, and transmit to FIO the workers compensation portion of its terrorism coverage data call. In this role, NCCI provides FIO with quality workers compensation data sets in a timely and efficient manner. NCCI coordinates these efforts in conjunction with the independent state rating bureaus, the monopolistic workers compensation states and the U.S territories.

Conclusion

Given the challenges presented by the terrorism peril, Congress determined a workable solution was needed that provides primary insurance carriers with a mechanism to manage the impact of the terrorism peril. That solution was the creation of TRIP, and it appears it may have contributed to a relatively stable workers compensation insurance market.

NCCI appreciates the opportunity to provide these comments on workers compensation insurance, the terrorism peril and TRIP. Please do not hesitate to contact me if you have any questions.

Sincerely,

Timothy L. Tucker

Washington Affairs Executive