NAIC Report On WC Carveouts Offers Oversight Recommendations

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Regulators are recommending that workers’ compensation carve-out business should be open to life and health insurers provided they have the know-how and can properly disclose how they conduct the business.

High up on a list of recommendations made in a recently released report by the National Association of Insurance Commissioners is a suggestion that any business be conducted at a high attachment level, or the dollar amount at which business starts to be ceded to a reinsurer, unless a company can demonstrate to its regulator that it has considerable expertise in reinsuring this kind of business.

A survey conducted by interested industry parties reporting to regulators that preceded the report suggested that carve-out programs generally have attachment levels of $500,000, and the attachment levels for pools and facilities are usually $1 million or higher for the majority of accounts written by life companies responding to the survey.

Other suggestions made by the underwriting and reinsurance pools working group include a recommendation that each state determine whether workers’ compensation carve-outs are allowed and then incorporate into its legal framework additional provisions needed to allow life and health insurance companies to reinsure this business.

Additionally, the report suggested that workers’ comp carve-outs be considered an ‘occupational accident’ so that it would grant a life and health insurance company the specific authority to reinsure it.

Another recommendation stated that a demonstration of due diligence should be required.

Stephen Johnson, deputy commissioner with the Pennsylvania insurance department, says that it will be up to each state insurance department to determine how it wants to use the report.

The next step that will be initiated at the fall NAIC meeting in Boston in September, he says, will be to start to discuss and review how reinsurance pools should be monitored.

A high attachment level, according to Johnson, is important. What is every bit as important, he says, is making sure that proper due diligence is conducted.

The work done by regulators began after Unicover Managers Inc., South Plainfield, N.J., now known as Cragwood Managers, LLC, participated in business from primary workers’ comp carriers that was underpriced.

When Reliance Insurance Company was placed in rehabilitation on May 29, its participation in Unicover was one contributing factor to the action, according to Johnson.

Unicover amounted to bad business decisions on underpriced workers compensation business, he continues. “No matter how the business is bundled, it was still underpriced business.”

When business is underpriced, he says, it can be difficult to detect until well after the fact.

One tool that will help regulators, Johnson continues, is a workers’ comp disclosure that will be in the 2002 annual statement blank.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 27, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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