Large-deductible work comp
A key to weathering the next market cycle
By Michael J. Moody, MBA, ARM
Across the property/casualty marketplace, there are now strong
signs of an upward shift in pricing. While increases in some lines are being
held in check because of the difficult economy and the resulting reduced
exposure base, rate hikes in other lines can no longer be put off.
Such is the case with workers compensation, which frequently is
one of the first lines to experience rate increases. Overall results for
workers compensation are concerning, but because premiums for this line are
based on state rates, some states are in much more perilous condition than
A concept that was introduced during the last hard market over a
decade ago may offer hope for some employers. The
concept—large-deductible workers compensation programs—has gained
popularity ever since. According to Gus Aivaliotis, vice president of large
casualty for Safety National Casualty Corporation, a key reason for the success
of large-deductible programs is that "companies can obtain many of the
financial advantages of self-insurance, without the administrative burden that
may accompany self-insured programs." Safety National was among the first
carriers to introduce the large-deductible concept, and Aivaliotis says, "It
has become a very good product for us."
Since it was founded in 1942, Safety National has been a leader
in the excess workers compensation market. For many years, excess work comp was
the only line the insurer wrote, Aivaliotis says, "But over time we have tried
to expand our product portfolio into other underserved areas." For example,
several years ago the traditional bond market hardened and left many work comp
self-insurers without any options for bonds, which many states require
employers to obtain in order to gain and maintain self-insured status. To fill
this gap, Safety National began to offer self-insured bonds to its excess work
Although Safety National had achieved notable success in the
self-insured work comp area, Aivaliotis explains, the insurer began to notice
some movement away from self-insurance during the soft market. To maintain
volume, Safety National created a large-deductible workers compensation
Although deductibles had long been used in property and auto
physical damage coverages, Aivaliotis notes that, historically, "Deductibles
have not been of sufficient size to be financially meaningful." Despite this,
he says, "They did in fact eliminate a lot of minor expenses associated with
As the deductible concept gained acceptance in workers
compensation, Aivaliotis observes, "It came in the form of a meaningful
deductible amount with an equivalent offset of a meaningful premium deductible."
As a result, he explains, the insurance buyer can maintain many of the
financial advantages of self-insurance while it "transfers much of the
administrative burden to the insurance carrier."
Most buyers of large-deductible work comp programs have chosen to
self-fund the deductible. Recently, however, some employers have begun using a
captive insurer to fund the deductible. Currently, Aivaliotis says, "The
majority of the accounts we look at are not using a captive." He adds, "The
decision to use a captive varies widely based on the nature and goals of the
buyer. For the right buyer, who
understands the captive structure and is comfortable with it, it can be a
terrific vehicle." As more corporate buyers begin to see the strategic value of
a captive, this trend can be expected to grow.
As noted earlier, rates are firming in the property/casualty
market, and this trend is likely to continue through 2012. And as often happens,
the shift is being led by increases in the workers compensation sector in some
According to Aivaliotis, "As the guaranteed cost market begins to
firm, we anticipate that some of those accounts that gravitated away from
retention and deductible programs will move back." Although guaranteed cost
programs had become very competitive, he notes, the pricing could not be
sustained. As a result, "We anticipate significant activity as the market
Although that is good news for Safety National, what does it mean
for the mid-sized retail agency or brokerage?
Aivaliotis observes that mid-sized retailers may have difficulty
gaining access to large casualty insurers because of their minimum volume
requirements. Even with the market hardening, "Unless you are a broker of
sufficient size, you may be precluded from some potential markets," he says.
At Safety National, he says, "We actually are what I consider an
'open brokerage' firm. If there is an opportunity for us, we are always open to
talking about new accounts." What's more, he points out, "We don't require traditional
agency contracts, which typically contain some type of volume commitment."
Safety National has
an active marketing department of 15 business development professionals, most
of whom are located in major metropolitan areas. The insurer has developed a
specific, sustainable approach to the commercial liability business, and it
expects mid-sized retailers to play a key part in its growth plans.
Leading the way
It again appears that workers compensation will lead the current
market hardening. As a result, many commercial insurance buyers will be seeking
alternatives to their current guaranteed cost coverage. Safety National has
several options that retailers and their clients may want to consider.
For many years, the insurer has been a strong advocate of
self-insurance. Because of the administrative burden, self-insurance may not be
the most appropriate option for some large accounts, so Safety National
introduced its large-deductible work comp program. To maintain its competitive
position, the insurer added general liability and auto liability coverages to
its large-deductible options. The three lines of coverage can be purchased as a
package program, or the large-deductible work comp coverage can be selected on
a monoline basis.
Aivaliotis emphasizes that Safety National believes that middle
market business will continue to account for a significant portion of its
volume. Bottom line, Aivaliotis says, "We remain committed to the independent
agency system and encourage mid-sized brokers to learn about our array of
For more information:
Safety National Casualty Corp.
Web site: www.safetynational.com