the surety industry and workers compensation guarantees casualty actuarial society presentation by:...
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The Surety Industry and Workers Compensation GuaranteesThe Surety Industry and Workers Compensation Guarantees
Casualty Actuarial Society
Presentation by:
Marsh Surety Practice
Drew Brach, Managing Director
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Three Things to Discuss
State of the Surety Industry
Workers Compensation Issue from a Surety Perspective
Workers Compensation Bond Forecast
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Surety Industry - 2001
Direct Written Premiums:– $3,473,100,578
Direct Earned Premiums:– $3,330,170,608
Direct Losses Incurred:– $2,748,411,932
Direct Loss Ratio:– 82.5%
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Surety Industry - 2001
Direct Written Premiums:– $3,473,100,578
Direct Loss Ratio:– 82.5%
Expense Ratio– 50%
Combined Ratio – 132.5%
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Surety Industry
What happened?
– Economy changed– Banks tightened credit policies– Bankruptcies increased– Enron– Kmart– Telecommunications Losses
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Surety Industry
Reduced capacity
Reinsurance problems - specific bonds
Industry Losses
Underwriting tightening
Sureties refocusing on core business
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Commercial Surety Risk ProfileBack to the Fundamentals
Capital Capacity Ongoing ManagementCharacter
Commercial Surety Risk Profile
• Financial Analysis
• Profitability
• Bank Line of Credit
• Working Capital
• Net Worth
• Financial Ratios Benchmarking
• Off Balance Sheet items
• Hidden Net Worth
• Rating Agency Reports
• Timely Payment of Bills
• Balance Sheet Strategy
• Operations
• Ability to perform
• Bond Form Terms
• Length of Obligation
• International
• Environmental
• True Risk of the guarantee
• Organization
• Management Team
• Integrity
• Honesty
• Trust
• Reputation
• Customer base
• Philosophy
• Continuity Plan
• Credit Report
• Business Plan
• References
• Supplier Relationships
• Single Bond and Total Aggregate Program
• Surety Rate
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Surety Industry
Problems our Clients face– Bond program cancellations– Rate increases up to 500% as
credit/capital market pricing driving surety rates
– Very conservative underwriting– No markets for risks with exposure
over 5 years– Primary Surety companies increasingly
asking for collateral to underwrite a bond
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Marsh Surety Business Survey Business that cannot be placed - 945
– 175 Risk Management
– 770 Middle Market accounts
Risk Management Accounts
– 35% reclamation/landfill closure
– 35% workers compensation and insurance premium bonds
– 15% energy supply bonds
– rest are all types of bonds for basically financially difficult companies
Middle Market Accounts
– 70% workers compensation, insurance premium and other long tail bonds
– remaining 30% are for financially difficult companies
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Workers Compensation Example
Old Reality– Triple B plus S&P rated company– $150 million in WC guarantees– no collateral requirement from Surety
Company– priced at 20 basis points
New Reality– $45 million capacity in marketplace– no collateral required by the Surety
Company– 100 basis points
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Workers Compensation Guarantees
Today’s Surety Market
– Underwriting and Rates based on: Credit Risk Workers Compensation Risk Reinsurance Costs Collateral provided
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Workers Compensation Guarantees
Underwriting - Workers Compensation Risk
– Type of Guarantee
– Bond Form / Cancellation provision
– Type of workers compensation claims
– Expected life of obligation
– Actuarial analysis of claims data
– Law requiring the bond
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Workers Compensation Guarantees
Acceptable Worker Compensation Risks
– Investment Grade Firms in acceptable sectors
Unacceptable Risks
– everyone else
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Workers Compensation Guarantees
Workers Compensation Surety Underwriting Issues
– long tail nature of obligation
– cancellation provision in bond
– understanding true risk exposure
– funding of workers compensation exposure
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Workers Compensation Bond Forecast
Sureties to provide guarantees for high investment grade companies in acceptable business sectors
No new capacity for these guarantees in the next several years
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Workers Compensation Bond Forecast
Sureties will continue to explore different types of collateral for these risks
– Letters of Credit
– Escrow account
– Bank of New York Trust
– Trusts
– Stocks
– Bonds
– Property
– Credit Default Swaps
– Accounts Receivable
– Equipment
– Other Assets
– Finite Risk
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Workers Compensation Bond Forecast
In order to get the Surety Industry to reconsider their stance on Workers Compensation Guarantees
– reduce the life of the obligation
– negotiate an acceptable bond form
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Workers Compensation Bond Forecast
Reduce the life of the obligation
– Surety covers the first 3 to 5 years of the credit risk
– Bank Letter of Credit covers the longer term credit risk
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Workers Compensation Bond Forecast
$10 million Deductible Guarantee
– Surety covers the first 3 to 5 years of the credit risk at $6,000,000
– Bank Letter of Credit covers the longer term credit risk at $4,000,000
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Workers Compensation Bonds
Questions