SUBJECT: TERRORISM-RELATED EXCESS LOSSES INCURRED ON POLICIES IN THE NEBRASKA WORKERS' COMPENSATION ASSIGNED RISK PLAN
DATE: May 1, 2002
The purpose of this bulletin is to notify insurers writing workers' compensation insurance in Nebraska of their liability should terrorism-related excess losses arise out of the operation of the Nebraska Workers' Compensation Assigned Risk Plan. We are also informing you that the loss cost multiplier used to determine assigned risk workers' compensation rates will be raised effective 7/1/2002 from 2.44 to 2.50.
From 7/1/1997 until 6/30/2002, the workers' compensation assigned risk plan in Nebraska was designed so that the voluntary market would not need to contribute to support operating losses. That is, there was no need for a "residual market load." Effective 7/1/2002, this will change - but only slightly. If a serious terrorism-related loss or losses are incurred on policies in the assigned risk plan with inception dates of 7/1/2002 or later, then voluntary insurers will need to pay for terrorism-related excess losses incurred by the Travelers Indemnity Company (Travelers), which is the insurer that writes assigned risk policies in Nebraska.
For assigned risk policies incepting 7/1/2002 or later, the Travelers' excess of loss reinsurance will cover individual losses exceeding $500,000 per occurrence. This reinsurance will exclude nuclear, chemical and biological events related to terrorism. Furthermore, the reinsurance contract has an aggregate annual cap of $9,500,000 for other terrorism-related losses that it covers.
If an event involving nuclear-chemical-biological terrorism results in excluded losses over the $500,000 threshold, then Travelers will retain up to the first $1,000,000 per occurrence. In addition, Travelers will retain the next $750,000 of annual aggregate losses in excess of the per occurrence threshold and/or the $9,500,000 terrorism cap. Losses that exceed these amounts will be apportioned amongst voluntary market carriers and governmental "self-insurance" pools in Nebraska in proportion to their written premiums.
We view it as very unlikely that an event will occur that will necessitate an assessment and it is the Department's view that the indicated pricing recognition of this contingency for voluntary insurers should be a small fraction of a percent - certainly not enough to warrant a standalone rate filing. As such, we have not developed detailed rules or the administrative structure to collect funds from insurers. In the near term, we will only do that if a triggering event occurs. Nevertheless, insurers should be aware of this contingency as an additional risk involved with writing Nebraska business.
Because a triggering event would be likely to be a well publicized calamity, we would probably know about it right away. If that happens, then we will notify insurers so that they can establish appropriate reserves. In the meantime, we are not advising insurers to set up reserves of an IBNR nature. We believe the chances of a major terrorist event causing a multimillion dollar Nebraska assigned risk workers' compensation loss are small; it is difficult to imagine how such an event could happen and go undiscovered for an extended period of time.
At this time, it is not possible to say how long this arrangement will last. Barring some kind of federal legislation, our arrangement with the Travelers makes it a function of the availability of reasonably priced reinsurance that does not exclude terrorism. If you know how soon reinsurance of that nature will again become available, please let us know.
For your convenience, we have reproduced the text of subsection 48-146.01(2). This is the applicable section of Nebraska law that authorizes the assigned risk plan and the possibility of assessments on insurers in the voluntary market.
L. TIM WAGNER
Director of Insurance