Chartis Exits Stand-Alone Excess Workers’ Comp Market

Chartis, the third-largest writer of excess workers' compensation, has stopped writing the business on a stand-alone basis, according to a regulatory filing.

Excess workers' comp has an extremely long tail and "is one of the most challenging classes of business to reserve for because it is highly sensitive to small changes in assumptions — in the rate of medical inflation or the longevity of injured workers, for example — which can have a significant effect on the ultimate reserve estimate," according to AIG's annual report, filed with the Security and Exchange Commission. Chartis is the property/casualty arm of American International Group.

Claims estimates are also sensitive to legal and regulatory changes, the impact of health care reform, claims settlement trends and new treatments, such as "pain management," the company said.

With the passage of the Affordable Care Act in March 2010, AIG "concluded that there is increased vulnerability to the risk of further cost-shifting to the excess workers' compensation class of business in particular. Settlement efforts can also be affected by changes to evaluation protocols implemented by the Centers for Medicare & Medicaid Services in 2009, which are expected to result in future prescription drug costs being borne by workers' compensation insurers to a significantly greater degree than in the past and thus likely to lead to further deteriorating trends for the excess workers' compensation class of business."

Also, Chartis acts as a reinsurer for about 20% of its excess workers' comp business from 2002 and earlier.

"These reinsurance contracts generally include the so-called 'follow the fortunes clause' whereby claims management is performed by the ceding insurers and the outcomes of these efforts are binding on Chartis as the reinsurer. Chartis has virtually no ability to affect the outcomes of these claims," the company said.

Also, underwriting actions in recent years have led to a "significant increase" in insured retention levels. That reduces the frequency of moderate-severity losses but extends the time period of the first report of claim, which causes further unpredictability in loss development patterns, the company said.

AIG posted a fourth-quarter 2010 charge to strengthen loss reserves for Chartis' long-tail property/casualty business, including excess and primary workers' comp business, (Best's News Service, Feb. 9, 2011). The reserve charge was also related to asbestos and excess casualty business.

About 80% of the 2010 loss development charge of $4.3 billion related to asbestos, excess casualty, excess workers' compensation, and primary workers' compensation lines, AIG said in the filing. About 83% of the charge related to accident years 2007 and prior (accident years before the financial crisis in 2008).

While there was no material development recognized for this class in 2011, AIG said it had projected claims 40 years into the future, then strengthened reserves by about $825 million, before discount, in the fourth quarter 2010. About $430 million of that reserve strengthening pertained to accident years 1999 and prior, with an additional $160 million attributable to accident year 2000, $140 million to accident year 2001, $80 million to accident year 2002, and only about $10 million attributable to 2003 and subsequent years.

For the year-end 2009 loss reserve review, AIG increased the loss development assumptions for this class of business, resulting in about a $925 million increase in reserves.

In addition to deciding to stop writing stand-alone excess workers' comp, Chartis also restructured the renewals of some commercial casualty loss-sensitive programs. Instead of using a retrospectively rated premium structure, the policies were restructured to have a loss reimbursement deductible structure.

The effect of restructuring those policies and exiting the stand-alone excess workers' comp line resulted in reducing 2011 premiums by $600 million, AIG said.

"However, given the capital intensive nature of these classes of casualty business, Chartis expects that over time, these actions will improve its results," AIG said.

The company said growing higher value consumer business continues to be a key strategy. Total consumer insurance net premiums written increased 21% in 2011 compared with 2010. But not counting the effects of foreign exchange rates and the Fuji Fire & Marine Insurance Co. Ltd. acquisition, consumer insurance net premiums written declined by 1%, primarily due to the nonrenewal of certain programs in the U.S. and Canada that did not meet the company's performance targets, AIG said.

Since 2009, Chartis' consumer insurance has increased net premiums written by 47%, primarily driven by the Fuji acquisition. In 2011, consumer insurance represented 38% of Chartis' net premiums written, compared to 30% in 2009.

AIG is the third-largest excess workers' comp writer by 2010 direct premiums written, according to BestLink. Safety National Group and W.R. Berkley are ranked as the first- and second-largest.

AIG, the second largest workers' comp writer, shrunk its overall workers' comp book from $6.73 billion in 2006 to $3.13 billion in 2010.

Workers' compensation writers are taking steps to improve the profitability of the troubled line, industry experts said. From 2006 to 2010, workers' compensation premiums fell by about 30%, while profitability dropped, said Ed Keane, senior financial analyst at A.M. Best Co. (Best's News Service, Feb. 27, 2012).

In the afternoon on Feb. 29, shares of AIG (NYSE: AIG) were trading at $29.22, up 0.9% from the previous close.

Chartis and most of AIG's other insurance subsidiaries currently have Best's Financial Strength Ratings of A (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])