Careful risk selection and higher rates
expected to produce profitable business
By Brett Hanavan
Although California's troubled workers compensation market continues to struggle, Bill Trzos views it as "an opportune time if you can select risk and underwrite objectively." Trzos and his partner, Steven Boyd, recently started managing general agent Cypress Point Insurance Service in San Diego to enter the workers comp market. "The potential for positive results is as good as it has been in years," he maintains.
Backed by a number of "A" rated companies, Trzos says: "The opportunity with the hard market has given us a better than normal chance for success. With support from solid issuing companies and reinsurance, the odds increase. Our expectation for underwriting profits is approximately three years. Our business model is based on writing only controlled business," he adds, "and the underwriting is very selective. We pride ourselves on the overall risk management of an account--regardless of premium size--and we focus our efforts to this end."
Trzos continues: "We have prior relationships with some carriers and reinsurers, but generally we are involved in an exhaustive due diligence by all partners. Our number one priority is to protect the investment of these companies. We work with them very closely on all aspects of the business, including claims, loss control, underwriting, etc."
He says Cypress Point also is "working very closely with our claims administrator, Gallagher Bassett. Our risk management unit analyzes every indemnity claim and works with the examiner, the insured and the producer for positive resolution. We also make sure all insureds are appropriately set up with return to work programs."
A very hard market
Although the California Department of Insurance has approved several double-digit increases for advisory rates, the actual increases have exceeded those. According to the Workers Compensation Insurance Rating Bureau (WCIRB), average insurer rates for policies written in 2001 were 22% above the average rates charged on policies written in 2000 and 50% above those charged in 1999.
Despite these increases, the workers comp accident year combined ratio for 2001 is estimated at 132, according to WCIRB, and could go higher "if the sharp loss development that has occurred over the last several years continues," says WCIRB Chief Actuary Dave Bellusci. The accident year combined ratios for the previous three years were 170 in 1998, 174 in 1999 and 154 in 2000. These numbers have been exacerbated by reserve strengthening necessitated by an estimated deficiency of $7.1 billion, according to the National Council on Compensation Insurance.
The problem has been a dramatic increase in severity, WCIRB notes, with the average cost of an indemnity claim hitting $43,300 in 2001, up 11% from 2000. Since 1995, the annual growth in severity has been 12%. At the same time, frequency has improved, with the 2001 claim frequency estimated at 55% of its all-time high in 1991, according to WCIRB.
Cypress Point plans to target homogeneous groups, programs, and associations and anticipates that, with careful risk selection and higher premium rates, it should be able to do much better than the average.
A welcome addition to the market
The entrance of new capital to this market should be welcome. The state has seen five of its top 20 workers comp insurers leave the state: Superior National, the third largest writer of comp in 1999, was liquidated in 2000; Fremont General, the second largest in 2000, and Legion Insurance Company, the fifth largest writer in that year, have both been placed under regulatory supervision; HIH America Group, the 10th largest writer in 1999 was placed in conservatorship in March of 2001; and Paula Insurance Company, the state's 19th largest writer in 2000, was placed in conservatorship in April of this year.
"The reality is that the cupboard is bare. MGAs, retail producers, and insureds are turning to the alternative risk market. With rate increases, the insured is going to be hurting," Trzos added. "I expect the market to remain hard for another two to three years. We should start to see some additional capacity by the 2nd quarter of 2003, as the dust settles on the benefit increase, but there is much work to be done."
Trzos adds that even the State Compensation Insurance Fund (the competitive state fund that writes more than 40% of the workers comp business in the state) has finally started to look closer at the way it evaluates business, and that will help attract new markets. "At the end of the day, that is what we need. New markets that are willing to see the opportunity that is now present in the state," Trzos says.
"We will soon diversify into other lines for a full package product," Trzos adds. "This will also strengthen our client base and secure stronger retention and relationships. Our niche is very selective. We appoint only key producers who have a solid proven book of business and who may also be willing to take some risk in the business."
Trzos spent the last two-plus years as vice president and underwriting manager for Arrowhead General Insurance Agency's workers comp division where he managed $40 million in workers compensation premium, created underwriting guidelines, and developed programs. Prior to his tenure at Arrowhead, he was a portfolio manager for Liberty Mutual Insurance. He has also worked as senior underwriter with American International Group, and as a senior underwriter at Golden Eagle Insurance Company, managing a $20 million workers compensation premium book of business.
For Trzos and partner Boyd, the return of the hard market represented an opportunity they couldn't pass up. *