Comment - Matters of concern - Sal Zaffino examines the problems facing US casualty reinsurers.

(From Reinsurance)

Byline: Sal Zaffino, chief executive of global reinsurance intermediary Guy

The casualty reinsurance market in the US has seen turbulent times in recent years, and there has been wide variation in conditions among the various casualty segments and lines of business.

In the workers compensation area, there is ample capacity in the catastrophe layers and an unstable market in the per person exposed layers, which are typically below $5m. The average severity of both the medical and indemnity portions of workers compensation claims has increased. This should not have a major impact on workers compensation catastrophe business, where capacity of more that $500m is currently available, but it certainly affects reinsurance layers that are per person exposed.

Consequently, reinsurers have reduced their overall workers compensation capacity in the layers below $5m, maintaining that associated loss costs are very difficult to predict and have a high level of uncertainty for many years. Rather than deploy capital in these layers, reinsurers are supporting workers compensation catastrophe business or other reinsurance lines of business, which they feel produce better returns. As the results of prior accident years begin to stabilise and margins even out, additional reinsurance capacity should become available in these layers, although this may take six to 18 months.

Key drivers

The key drivers of workers compensation rates and availability continue to be Californian exposures. Heavy concentrations of employees in urban areas may also influence price. The overall cost of workers compensation catastrophe is down about 10% in 2003, with larger decreases in regional business. Further reductions are anticipated for 2004.