The inside-outside story

Risk & Insurance, Dec, 2004 by Peter Rousmaniere

In many states one or a few insurers serve as market leaders for the guaranteed premium business, the type of policy the majority of American businesses buy. A tale of two states reveals how critically important premium pricing by leading insurers is to safeguarding an insurance market. The serious damage inflicted by casual pricing by a leading insurer is how it obscures the role of employers in a system of risk assessment

Maine Employers Mutual Insurance Co., a stable and uncharismatic company if there ever was one, focused on correct pricing. It refused to discount. Its refusal effectively strengthened the in-state market. Maine's average premiums went from 82 percent higher than the national average in 1992 to 21 percent higher than average in 2002.

The California State Insurance Fund kept prices low and grew to be the largest workers' comp insurer in the galaxy. Average premiums rose from 57 percent above national average in 1992 to 127 percent above average in 2002, according to estimates from Actuarial and Technical Solutions.

Given these two different eases, let's see what caused them to take very different paths.

John Leonard, CEO of Maine Employers, thinks that his and other workers' comp insurers have an advantage if they have at least a 10 percent market share, are among the top players in their market, and sell--or at least act as if they only sell--workers' comp insurance. These insurers can better focus, and have more options within their markets. This is the outside story.

To Leonard there also is an inside story of nurturing good pricing habits. The price of the policy is the present value of all that could go right or wrong, much beyond direct control of the insurer, much in the hands of the employer who is in charge of prevention and the critical first line of injury response.

Variances in practices and outcomes among employers are vast. Learning and translating them into a price for a policy is no easy task. Maine Employers was adept at accepting an employer if it remedied specific weaknesses. It helps if the CEO believes that really knowing the customers and their industries may be the best shot an insurer will ever have for long term survival.

Founded in the early '90s through a state reform package, Maine Employers absorbed a bloated assigned risk pool. In the soft market of the late '90s it lost much of its business, only to regain it as the market hardened. Another startup, Acadia Insurance, turned careless in underwriting. Brokers noted that and steered questionable risks to Acadia, furthering its downward spiral.

If a leading insurer in a market expands as rapidly as did California's State Compensation Insurance Fund, then pricing must lose its power as a signal of risk. SCIF compromised an early-warning system for the market, and that resulted in discounting. Some insurers failed. Others left the market. Brokers who led their accounts to SCIF apparently did not care that SCIF's financial figures were falling well below what the market would tolerate for a private insurer.

It is easy to see how loss inflation, hard for anyone to perceive early, embedded itself. In the end, premiums chased the losses upward. California has ended up with by far the highest workers' comp premiums in the country. Maine Employers reaps above average returns within a stable, competitive market. SCIF is in worse financial shape than just about any other comp insurer and premiums in the state are sky high.

PETER ROUSHANIERE is a regular columnist for Risk & Insurance. He can be reached at www.riskletters@lrp.com.