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11/16 M97/February 2018 Reinsurance

E3A Proportional workers’ compensation business
• Underlying workers’ compensation law and the level of imposed indemnity.
• The level of autonomy that the insurance company has in determining degrees of disability, applicable
tariffs, rating regulation and the obligation to insure high-exposure risks.
• The expertise of the insurance company regarding workers’ compensation business.
• What specific classes of business would be ceded to the proportional treaty?
• What, if any, is the extent of any North American exposure being ceded to the treaty?
• What is the territorial scope of the business being underwritten and is the liability ‘unlimited’? If not,
details would be expected as to the limits being provided by the cedant.
• Checks on costs of medical treatment which involves containing the costs of medical treatment using
managed care ensures that suggested medical procedures are necessary and alternative, less
expensive treatments are also considered.
• Portfolio balance in terms of risk categories according to degrees of hazard.
• Occupational diseases exposure.
• If the portfolio is not new, the assumptions used regarding the ultimate loss ratio and checks on the
run-off payout pattern for each underwriting year should be checked by use of a mathematical model.
• If the portfolio is new, the rating approach used, both by the market in general and the company
specifically, should be checked by use of a mathematical model.
• Although variable premiums are generally to be avoided due to especially long and hardತtoತestimate
run-off, loss participation and loss corridor clauses would be very beneficial as these would ensure the
insurer maintained an active interest in the losses which have impacted the reinsurance.
• Reinsurance treaties with a provision for automatic renewal should also include a provision stipulating
a period of notice for provisional cancellation, and the conditions should be renegotiable or
amendable at each yearly anniversary.
• Bordereau showing agreed detail on an underwriting year basis, for analysis of development according
to portfolio segments.

E3B Non-proportional workers’ compensation business Reference copy for CII Face to Face Training

• Analysis and pricing:
– Analysis should be done on an accident year basis with pricing linked to other casualty classes with
a suitable return on the premium to take account of any unexpected adverse deterioration.
– In the case of catastrophe excess of loss per event programmes the reinsurance treaty should
stipulate an annual aggregate or reinstatement limit of a maximum of the relevant layer capacity.
– In determining exposure and pricing for catastrophe covers any deductible or self-insured retention
policies should be taken into account.
– Potential accumulation exposure should be considered taking into account the portfolio shares of,
say, construction companies, airline crews, transportation of other, relatively large groups of people,
or groups of professional athletes.
– In markets where workers’ compensation policies include an EL component, a sublimit or exclusion
should be imposed.
– The conditions should be renegotiable or amendable at each yearly anniversary.
• Definition of ‘event’:
– Agree a clear definition of event consistent with that used in other casualty classes.
– Avoid definitions solely dictated by the workers’ compensation insurer or the social insurance
institution concerning the time at which the point of indemnity is determined.

• Indexing:
– Use index clauses that are customary in the market and consistent with practice in other casualty
classes.
– Due to long-term exposure, special attention needs to be given to the effects of hyperinflation on
medical treatment costs.

Example 11.7
Arizona and North Carolina were the first US states to enact workers’ compensation fee schedules in the late 1920s.
11 However, the use of fee schedules only boomed in response to hyperinflation in workers’ compensation medical
Chapter
costs beginning in the late 1980s.