FWCJUA Reinsurance Committee Meeting Report: August 24

The Florida Workers’ Compensation Joint Underwriting Association (“FWCJUA”) Reinsurance Committee (“Committee”) met on August 24, 2009, during which meeting it focused primarily on reviewing the FWCJUA’s 2010 reinsurance goals and marketing strategy.  The meeting materials and agenda are attached for review.

The FWCJUA’s objectives for its reinsurance program include:

• Minimizing policyholder resources devoted to reinsurance;
• Creation of a program that reflects a balance between price and coverage;and
• Obtaining flexibility in order to accommodate unexpected growth or further depopulation.

Historically, the FWCJUA has maintained a multiple layer excess of loss program, while retention and layers have varied.  To view the current reinsurance program structure, please refer to Page 4 of the meeting materials.

The depopulation trend that began in 2004 with the introduction of tiered rating plans has continued through 2009. Cumulative loss results have been “dramatically better than anticipated,” and reserves have been adjusted downward.  Depopulation and other favorable development trends are expected to continue through 2009.

 

FWCJUA 2010 Reinsurance Renewal Program Goals

The Committee reviewed the FWCJUA’s Reinsurance Renewal Program (“Program”) goals, which were structured in consideration of the FWCJUA’s financial status, past performance, current book of business and the expectation that the 2010 premium, account “mix” and uncollectible premium impact will be similar to the 1998-2000 and 2005-2008 policy year/accident year profiles.  The goals are:

• To design the Program based on a projected 2010 earned premium level of $8.0 million and a policy count of 800;
• To approach the 2010 Program design by creating an effective alternative structure or mechanism to that of the current program (2005-2009) and place a risk assessment on various suggested programs (for example, a combination risk transfer product/reinsurance program);
• Conduct a risk assumption analysis in conjunction with either the FWCJUA’s intermediary’s actuary or a consulting actuary whose analysis would describe how much risk the FWCJUA could assume at various attachment points and the implications of that risk assumption;
• Determine if a “new” profit share valuation/computation feature is advisable or available;
• Obtain, where possible, collateral arrangements to be implemented in the event of reinsurer financial problems;
• Obtain, where possible, the commitment from reinsurers that any letter of credit requirements will be issued through participating banking institutions with a “stable” rating (the Committee must determine the definition of a “stable” rating);
• Attempt to get nuclear, biological, chemical and radiological (also known as “NBCR”) terrorism coverage in the regular Program by removing the exclusion for this type of coverage from the 2010 contract; 
• Evaluate the financial conditions of all current reinsurers and advise what actions, if any, are required; and
• Take whatever steps are appropriate to ensure that both current and potential reinsurance markets are fully accessed.

It was agreed that the 2010 FWCJUA Reinsurance program should specifically:

• Reduce rates and/or index them to unanticipated premium growth, with the goal of reduction in overall rate or product cost;
• Include a “one-way” cancellation clause in order to allow the FWCJUA to handle dramatic reductions in premium at a minimal cost;
• Protect the FWCJUA in the event of financial difficulties of the reinsurers;
• Protect the FWCJUA in the event of financial difficulties of the banks utilized by reinsurers to post letters of credit, including any and all banks with corresponding commitment shares;
• Determine the optimum reinsurance coverage; strive to reinstate prior exposure types that were excluded; and review the annual aggregate deductibles (“AADs”), Maximum Any One Lives (“MAOLs”) and attachment levels.  Higher attachment points similar to the 2009 program were suggested (i.e. $1 million or $2 million, since the FWCJUA is in a surplus position);
• Provide alternative approaches to obtain equivalent, better or different reinsurance coverage;
• Obtain more favorable minimum reinsurance premiums or, at the minimum, retain 2009 levels and spread the minimum premium (for at least the first and second excess layers) over a minimum of two years from January 1, 2009 through December 31, 2010 to help relieve any potential minimum premium penalty resulting from the FWCJUA’s decreasing premium volume; and
• Obtain statutory reinsurance limits if such a program is available at a reasonable price.

 

Outlook

The FWCJUA intends to remain a single-line insurer underwriting only workers’ compensation and employer’s liability residual market coverage in Florida with actuarially-sound rates.

Over time, the FWCJUA’s positive loss development has exceeded actuarial expectations and resulted in dramatic reductions in all accident years’ loss reserves. There has been very little reinsurance activity and few payouts.  No increases in activity for 2010 are projected, however, additional book of business depopulation is expected during that time.

Other conditions that are expected to inhibit FWCJUA growth during 2010 include:

• Coverage is available and actively being written in the voluntary market;
• There appears to be no discernable changes in voluntary market underwriting requirements, restrictions and/or alterations in leasing company (“PEO”) selection criteria or rule changes governing the status of “non-reported” or non-leased employees;
•  Voluntary market insurers appear to be able to obtain favorable reinsurance arrangements;
• The sluggish economy–particularly the housing construction slump–is expected to continue;
• The price differential between the FWCJUA rates and the voluntary market rates, as well as the FWCJUA’s “unattractive” producer fee schedule should continue to encourage producers to secure coverage for employers within the voluntary market;
• Employee leasing operations should continue to provide coverage for small employers, including some contractors;and
• The take-out/keep-out programs were enhanced in 2008 and will continue to be leveraged.

Discussion took place regarding the status of the FWCJUA’s reinsurers relating to commutation matters.  Payments by FWCJUA reinsurer PMA have shown a pattern of significant delay since 2008.  Since an A.M. Best downgrade of PMA in 2003, PMA’s payments had been monitored and the potential for commutation has been regularly considered by both the Committee and the Board. 

Several discussions have been held between representatives of PMA and another FWCJUA reinsurer relating to making up the difference. Suggestions on how to do this included handling the individual open claims, and discounting rates, and incurred but not reported (“IBNR”) losses.  However, the FWCJUA has been unable to reach an agreement with PMA to date.  

Although no other PMA downgrades have occurred that would demand action, FWCJUA has expressed overall dissatisfaction with the company’s handling of its commitments.

The Committee briefly discussed negotiating letters of credit with several banks, along with entering multi-year contracts that would be expected to be conducive to better yields.  Subsequent to a recent FWCJUA audit, concern was expressed that the rating of one of the FWCJUA banks had dropped.  Although that particular bank’s ratings have recovered, the Committee discussed placing a rating-related clause in FWCJUA contracts as a precaution against future similar incidents.  

The meeting was then adjourned.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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