As a result of COVID-19, the National Council on Compensation Insurance (NCCI) — the workers comp ratemaking organization used by two thirds of the states — has broadened its definition of catastrophes. NCCI’s definition of a catastrophe or “cat” now includes any event, regardless of the specific peril, exceeding $50 million in aggregate WC losses. To prepare for these events the NCCI has also built a catastrophe risk factor or “cat provision” into their workers comp rates. The following summary of how NCCI is preparing for future catastrophic losses is adapted from a presentation by Katherine Williamson, Data Science Director for the NCCI. (See the link to the entire video at the end of this article.)
September 11
NCCI first started to rethink its approach to catastrophes following the events of September 11. That event remains the costliest WC catastrophe to date—with more than $3 billion in losses paid. At the time, no provision was in place to help cover the losses. In response, NCCI introduced two catastrophe provisions into its rates in the years immediately following. Those rate provisions reflected the long-term view of future risk.
TRIA
The first catastrophe provision covers terrorism losses. The amount of the provision was determined through a terrorism catastrophe model that considered the Terrorism Risk Insurance Act (TRIA). Enacted in 2002, TRIA is a federal backstop for insured losses from large-scale acts of terrorism. Because of TRIA, terrorism losses are contemplated separately from all other catastrophes. The approved voluntary loss cost/rate is a half penny in most NCCI jurisdictions.
Prior to COVID-19, the second catastrophe provision covered losses exceeding $50M originating from earthquakes, noncertified acts of terrorism, or industrial accidents. COVID-19 has shown that there are other perils that may result in catastrophic losses
Given the relatively low frequency of WC-related catastrophic events, these provisions allow for the collection of catastrophe-related premiums over time that may be used to pay for catastrophe-related losses when they occur.
NCCI’s Current Cat Provisions
Since the implementation of the catastrophe provisions in the early 2000s, NCCI has updated the catastrophe modeling underlying the provisions several times. The current cat provisions have been determined through catastrophe modeling of pandemics, earthquakes, tsunamis, and industrial accidents. The voluntary loss cost/rate is a penny in all jurisdictions where approved.
Looking Forward
Williamson raises several questions at the end of her presentation. Based on relevant industry topics, there are several considerations that can shape NCCI’s understanding of WC catastrophes in years to come.
• How does remote work impact the exposure assumptions underlying the catastrophe models? Exposure may increase due to the blurred line between working and nonworking hours. However, with less geographical concentration of workers, there may be less risk of multiple individuals being injured by the same event.
• Will we see more catastrophic losses generated from a small number of claims, such as a multicar collision? Could the $50 million threshold be reached from a single claim? Today, some of the largest claims reported to NCCI have more than $30 million in case-incurred losses.
• How will climate change impact WC? Storms do not typically generate catastrophic losses due to the lead-time weather models and other advance-warning mechanisms provide. However, more frequency and extreme conditions could amplify the impact of known perils, such as extreme heat, storms, and wildfires, on the WC industry.
Regardless of uncertainty, the catastrophe provision included in workers comp ratemaking by NCCI, and its broadened definition, will help to prepare for potential future extraordinary loss events.(You can view the entire video presentation here: https://tinyurl.com/mrxcuzyr [26 minutes])
For more information or help, contact the Insurance professionals of EPIC’s CRA ProRental™ Insurance Program. Call us at: 800.234.6363 or email us at prorental@epicbrokers.com.
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