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Captive Insurers Beware: Pricing Erosion Spreads to Workers Compensation

Caution
September 16, 2016

The last truly hard market in commercial lines was 13 years ago, more than 4 years longer than the average soft market cycle length of 9 years. What began in the commercial property markets and then spread to casualty lines now seems to have claimed workers compensation as well.

On September 12, 2016, A.M. Best published a press release titled "A.M. Best Special Report: Workers' Compensation Market Has Likely Entered Soft Market Phase." While the report is focused primarily on state funds that provide workers compensation insurance in many markets, the conclusions are fairly indicative of what many captives are facing as well. As described in the press release, "the report cites concerns going forward such as the recent declining trend in workers' compensation pricing, the prolonged low interest rate environment, the potential for less favorable reserve development and the uncertainties relating to potential workers' compensation legislation and health care reform" as issues facing the workers compensation market.

Of note, as well, are the three headlines we ran on September 14, 2016, in Captive Wire.* The first, "Reinsurance Capital Hits New Peak of $585bn," on an article by Scott Neil in the Royal Gazette, announced reinsurers' combined capital had set a new record at $585 billion. The second, "Axis CEO: Reinsurance Pricing Unsustainable," on an article by Raymond Hainey and also in the Royal Gazette, concerned an interview with Albert Benchimol, Axis Capital president and chief executive officer, at Monte Carlo's industry conference Rendez-Vous de Septembre. He comments on reinsurance pricing being unsustainable and the issue not getting a lot of attention at the conference. The third story (see "Hiscox Announces Intention To Launch Collateralised Reinsurance ILS Capability") announced that Hiscox is building capacity in insurance-linked securities (ILS) reinsurance collateralization. The first and third stories certainly should give the reader pause about whether underwriting discipline can be maintained in reinsurance leading to a firming of prices that Mr. Benchimol is calling for.

All of this suggests captives need to be prepared to deal with a continuation of the current soft market. Captives have the following three alternatives to deal with the existing pricing landscape.

  • Do nothing ("ride the wave").

  • Hunker down (reduce costs).

  • Manage through the challenge (create/identify opportunities).

Those choosing to ride the wave must be prepared for the inevitable wave break when it occurs.

* You don't subscribe to Captive Wire? It's fast, easy, and free—just submit your name and e-mail address in the column on the right-hand side of this page.

 

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