Insurance Rates Heating Up

Insurance Customers Discover Higher Rates, Fewer Options

 

by Dave Brumbaugh

 

For many years, renewals in most lines of insurance were a benign matter. Unless something had changed your risk profile (five speeding tickets in a year, adding dynamite to the shelves of your grocery store, etc.), premium increases were small and renewals were routine for agencies and their customers.

However, that extraordinarily long cycle of a “soft market” for insurers ended abruptly in 2001, punctuated by the losses caused by the Sept. 11 attacks on the World Trade Center and the Pentagon.

Major natural and manmade catastrophes in the world caused $115 billion in losses last year, Swiss Reinsurance reported in late December. The Sept. 11 terrorist attacks alone cost an estimated $90 billion, of which $19 billion was insured, according to Swiss Re, the world’s second-largest reinsurance company. As a result, 2001 was the third-largest year for insurance losses since the company began keeping records in 1970.

“At over $115 billion, the economic losses are more than three times the average for the 1990s,” says Swiss Re in its report.

The resulting increases in premiums are no surprise to Paul Kenner, owner of Snapper Shuler Kenner Insurance in Lynden.

“Worldwide reinsurance and major national insurance companies were hurt real bad,” he says.

 

Good while it lasted

Outside of health insurance, consumers had enjoyed a “soft market” for insurance for about twice as long as usual.

“Rates were steady or going down for 15 years,” Kenner reports. “We’ve had the longest cycle of a soft market in history.

“We all knew that a hard market was coming,” he continues. “It was well on its way before 9-11.”

According to the Insurance Information Institute, 2001 renewal increases in most major commercial lines were in the range of 10 percent to 15 percent. After Sept. 11, the increases for 2002 renewals in many of those same lines doubled to approximately 30 percent on average.

The attacks that day affected many areas of insurance: life, property, workers’ compensation and loss of income.

Insurance companies generally are happy if their combined losses total just slightly below revenue from premiums because they can earn more money from investments. However, Kenner says he’s heard of companies where the ratio of losses to premiums last year was 1.60:1. Also, income from investments fell as the stock market struggled and interest rates for bonds dropped.

The extraordinary losses took much capacity out of the insurance industry. When companies had to pay out large amounts in damage claims, their reserves plummeted, legally limiting how much insurance they could issue. Some companies have stopped issuing insurance in specific industries and geographic areas

“I don’t know of any company that’s immune to this,” Kenner remarks.

 

Risky businesses

Businesses with above-average insurance risks are being hit especially hard now by premium increases and fewer choices, says Rob Knode of Brunhaver & Brunhaver Insurance in Bellingham. For example, a company may have increased its premiums 15 percent for businesses with standard risks but hiked them 30 percent for “risky” businesses – if they now offer insurance for them at all.

“If it’s outside the box, (insurance companies) don’t have money for that anymore,” Knode comments.

Knode lists businesses such as retailers, wholesalers, florists, bookkeepers and restaurants that don’t serve alcohol as standard risks. Their products and services don’t have much potential for high liability losses

Businesses with above-average risks include manufacturers (product liability), restaurants with a high percentage of alcohol sales and companies that work with dangerous materials, such as those offering welding services.

Companies that offer insurance for above-average risks usually limit their exposure by sending out much of that coverage to reinsurers such as Swiss Re and Lloyd’s of London. Consequently, when reinsurers lose money, their rates go up and regular insurance companies must increase their rates.

“Reinsurance really took it in the shorts in New York,” Knode reports.

Construction companies have been hit as hard as any sector. Insurance already was rising and tough to obtain in Washington because of a rash of construction-defect lawsuits involving siding. Two of the three major suppliers of insurance in the state for commercial and residential construction have withdrawn from this market, Knode says. Premiums for contractors and related businesses have risen 30 percent and more.

“The contracting market is in complete turmoil,” Kenner remarks. “This is really hitting the contractor market.”

He adds that the insurance problem for contractors is particularly acute in multifamily housing because of construction defect claims.

“It’s going to either slow it down or make it real expensive or both,” Kenner predicts.

 

Options for help

Since premium renewals are anything but routine now, insurance agencies are spending more time with clients, explaining the increases and offering alternatives.

“Agents that offer consultation rather than just products do better,” Knode says.

Deductibles now are common in liability policies, he reports. However, many businesses can’t lower the amount of liability coverage they carry since specific levels often are required in their contracts with other businesses.

In property insurance, businesses are looking at higher deductibles. Some are accepting different valuations – such as agreed value, functional replacement and actual cash value – than replacement value if their building is destroyed by a fire or similar event.

“Deductibles is one of the major areas where we can save (premium costs),” Kenner notes. However, he adds that many businesses already had raised their deductible levels.

Knode notes that some businesses now find it worthwhile to implement risk-management steps, such as alarm systems and fire sprinklers, which lead to discounts in insurance premiums.

During these tumultuous times in insurance, Kenner reminds agents and clients alike that the industry has ups and downs just like others.

“There’s so many people who’ve never seen a hard (insurance) market,” Kenner says. “But the cycle will change again.”