CFOs and risk managers are struggling to find healthy fixes in the face of big premium hikes.

The Texas Boll Weevil Eradication Foundation is not in the airline industry. Yet many of the company's employees were misclassified as "aircraft: pilots" and "aircraft: all other" under its workers' compensation policy. After those employees were correctly reclassified as entomologists, the organization received a refund of more than $100,000 and a $60,000 reduction in its annual workers' comp premiums.

To succeed in today's tough insurance market, businesses must understand that short-term lines of attack, such as auditing employee classifications, can have long-term implications on the bottom line. In mid-2001, workers' comp premiums were increasing by around 15 percent annually, driven mainly by rising medical costs. Hewitt Associates projects 13 percent to 16 percent average cost increases for corporate health plans in 2002, on the heels of a 10.2 percent surge in 2001. However, since the September terrorist attacks, 15 percent increases have begun to look attractive.

Many risk managers and CFOs have been taken aback by recent renewal notices on which workers' comp premiums have spiked to 40 percent or more, even for companies with minimal loss experience. "Roughly half of this increase is due to the Sept. 11 effect, in addition to the generally more expensive cost of reinsurance," explains Robert Hartwig, senior vice president and chief economist with the Insurance Information Institute in New York City. "Plus, insurers often are unable to obtain reinsurance at all and must assume all the risk on their own, which makes the prospect of offering workers' comp insurance much more risky."

In accordance with regulations enforced by state insurance departments, insurers cannot exclude losses caused by terrorism in their workers' comp underwriting contracts. But a safeguard preventing reinsurers from excluding terrorism-related workers' comp losses expired in January and was not renewed by Congress. So workers' comp carriers must shoulder the burden of terrorism losses, and companies, which must cover employees with some form of workers' compensation insurance, are left scrambling to find appropriate coverage at a decent price.

For businesses with excellent loss records, the recent rise in premiums is difficult to stomach. "Yes, the market was hardening before Sept. 11, but not to the extent that we're seeing now," says Robert C. Wellman Jr., director of risk management for Risk International Services Inc., a risk management consulting firm, in Richfield, Ohio. "It's as if workers' compensation underwriters have been given carte blanche to add 10, 25 or 50 points to the percentage increases they were going to ask for anyway. Whether it's actuarially justifiable or not, that's what they're doing."

Paying More, Getting Less

At the same time they're looking at soaring premiums, companies are facing more conservative underwriting. "I don't know if anyone has received a quote where they were given the same exact limits as they had before," says Wayne Salen, a board member of the upstate New York chapter of the Risk and Insurance Management Society (RIMS) and director of risk management for First Niagara Financial Group Inc., a financial services and bank holding company in Lockport, N.Y. "If they were, then the price was dramatically higher. For example, in primary lines, umbrellas are as much as 50 percent less in terms of limits and coverage. That creates additional work to rebuild the program to the satisfaction of company executives and shareholders."

This topic dominated discussions at a recent meeting of the upstate New York RIMS chapter. "The reality is that New York state suffered almost 10 years of [on-the-job] fatalities in one fell swoop," says Salen. "There's no question there is an upward push on comp. And we've seen much more conservative underwriting, particularly with regard to a congregation of employees. It's very difficult to get a feel for who's accepting what, and what their cutoffs and expectations are. You never really had to worry about that before. Workers' comp was workers' comp, and just about everybody would quote it."