Our Panel of national experts explored the current marketplace for transferring WC liabilities and the competitive pressures that are driving an interest in loss portfolio transfers.
Swiss Re’s Ethan Vaughan moderated the opening educational session, “Why Should an Entity Cede WC Retentions?”, which explored the current marketplace for transferring WC liabilities and included panelists Binh Wynne (Safety National), Lisa Walsh (Swiss Re) and Edward Torres (Willis Re).
The first panelist, Binh Wynne, led off the session with an overview on the state of the workers’ compensation market explaining that despite declining rates in recent years, payroll growth contributed to a steady increase in direct premiums written leading up to 2018. Binh added that market drivers consisting of regulatory reforms, technological advancements and a decline in loss frequency will continue to prove beneficial for this competitive line.
Binh then cautioned on the existence of possible uncertainties within the line, including: (1) regulatory changes; (2) ULAE costs increase; (3) legal trends; (4) economic risks, and; (5) fund assessments. Additionally, Binh stated the requirements of actuarial reviews, financial reporting and collateral requirements continue to create statutory constraints.
In his closing comments, Binh shared the necessary requirements for a carrier to successfully manage legacy claims including expertise in claims, legal and underwriting disciplines as well as with a strong capital position.
Next, Lisa Walsh discussed the common barriers to purchasing retrospective protection starting with the perception that it is an onerous process requiring a significant amount of data. As a reinsurer, Lisa summarized the key steps in her underwriting process starting with receipt of a recent actuarial report along with detailed claims data, which enables the development of an indication. Upon acceptance of an indication, the vital stage of due diligence is conducted followed by the firming up of the transaction terms allowing for the final execution phase.
Lisa continued by sharing additional hurdles including the view that retrospective transactions are too expensive, considered to be one size fits all and that potential clients have yet to discover that such options exist to provide finality for liabilities. In spite of these misperceptions, Lisa explained that this is a highly active marketplace with individualized transactions to address specific client needs as well as expert claims handling and the consequential benefits of cost mitigation strategies.
Speaking from the broker’s perspective, Edward Torres examined trends within the WC underwriting cycle and historical developments. Ed pointed to the competitive pressures that are driving an interest in loss portfolio transfers and that such transactions are now an acceptable capital-management tool. He also identified viable options as appropriate solutions for economic, legal and operational transfers involving loss portfolio transfers, adverse development covers, entity sale, novations and Part VII/IBT transactions.
Ed moved on to the topic of improving rating agency capitalization stating how rating agencies place value on retrospective contracts. He added, that while A.M. Best is concerned with challenging market conditions, improvement to BCAR (Best’s Capital Adequacy Ratio) can be accomplished utilizing LPTs and ADCs by reducing the loss and ALAE reserve risk by protecting insurers from the negative effects of adverse loss development and improve earnings quality.
In his concluding comments, Ed emphasized the additional benefits to insureds when a retroactive transaction progresses to the due diligence stage, which includes valuable insights into the client’s reserve valuations and claims operations beyond the scope of price and structure.