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Sticker Shock
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Individuals
and businesses are bracing themselves for skyrocketing insurance
rates.
By William Poe
What do Sept. 11, Enron, last year’s stock market downturn, and
industry consolidation, all have in common? Well, they’re all reflected
in your higher insurance premiums this year. You know those premiums—the
ones that are at least 15 percent higher than those of last year,
possibly a lot higher.
Insurance rates are skyrocketing. The trajectories of some insurance
categories are higher than others, but experts say you are paying
significantly more this year for virtually all types of insurance
on your business, your home and your car. And that’s the good news.
The bad news is you now stand a greater chance of losing coverage
entirely. That’s the cancellation bomb.
“A lot of carriers are just sending out letters of cancellation
rather than notifying policyholders of changes in coverage or complying
with state-mandated disclosure regulations,” says Ralph D. Heck,
a certified insurance counselor and broker with C.J. Thomas Co.
“The end result is you have to negotiate from scratch to obtain
coverage.”
According to a recent report from the Insurance Information Institute,
total premiums are expected to rise 15.1 percent this year. And
while higher rates are bad enough, higher deductibles and cutbacks
in coverage are also common, brokers say.
“Underwriters are being told to get rid of unprofitable accounts
and those with a loss and to add 15 to 20 percent to the premiums
of those who are being renewed,” Heck says.
For so-called directors and officers (D&O) insurance, which protects
both the assets of a company and the personal assets of the directors
and officers against certain claims, “public companies could be
looking at 30 to 40 percent hikes with higher retensions or deductibles
and less coverage,” says Julie Lotspeich, vice president and financial
risk manager for Daniel & Henry Co. “Private companies could be
looking at 10 to 20 percent increases.”
Health insurance rates are rising on average about 18 percent this
year, according to Walter G. Stern, principal of W.G. Stern & Co.
“If a company has a good claims history, you could see less. If
you have a history that’s not as good, you could see a bit more.
Smaller companies are taking a bigger hit than large ones, but it
depends on the claims experience of the pool.”
Brokers say that individuals and businesses are both experiencing
sticker shock this year. But they point out that the current pain
is at least partly a result of artificially low rates for the last
10 to 15 years.
“In recent years, all of the insurance companies were consolidating,”
Heck says. “They all wanted to grab market share, so they were essentially
buying business by charging low rates, sometimes as low as 32 cents
on the dollar. Historically, rates would rise for seven years and
drop for seven years, but until now we’ve been in a 15-year cycle
of declining rates. They’re now playing catch-up.”
Heck points out that insurers normally make money in two ways: from
premiums themselves and from investment gains on the premiums paid.
During the go-go stock market days of the 1980s and 1990s, the industry
relied on investment gains. There was an ample supply of capital,
and competition was keen. As a result, premium prices stayed low
and, in fact, did not reflect actual losses.
For most of last year, premiums increased as the stock market stumbled.
Then came 9/11.
“September 11 cost the big insurance companies a lot of money,”
Stern says.
“September 11 was after-the-fact,” Heck says. “It was an excuse.”
“There was already a hardening of the market,” Lotspeich says.
“September 11 and Enron put the final touches on it.”
Everyone agrees that rates have really jumped since.
“It had a ripple effect,” Stern says.
Heck says much of the premium surge since Sept. 11 can be blamed
on higher costs of reinsurance. He points out that the insurance
business is all about sharing risk. A company negotiates coverage
with a primary insurer or several primary insurers and they, in
turn, share the risk with a pool of reinsurers. The reinsurance
industry was hit hard by Sept. 11 losses, he adds, and higher reinsurance
rates were appearing with a vengeance by January 1.
“There’s a standard formula a company uses for calculating any insurance
premium,” Heck says. “Thirty percent is the cost of reinsurance,
30 percent is the risk of loss, 30 percent goes to administration,
and the final 10 percent is brokerage fees. The formula never changes
so higher reinsurance costs or losses mean higher premiums and/or
restricted coverages.”
The biggest impact of the current insurance and risk climate, brokers
say, is in the cost of umbrella coverage, which provides protection
above the limits of general liability and automobile insurance,
and in the area of contract surety and performance bonds.
In the really difficult markets, customers are being hit with up
to 300 percent increases for umbrellas, Heck says. “Umbrellas are
the slot machines of the insurance industry. They are a real money-maker,
but are really a crap shoot because those who want umbrellas also
have the highest exposure. And now they have to pay more for the
higher risk.”
The surety market, Lotspeich says, has been turned upside down by
the Enron collapse, because of losses on financial guarantee bonds.
“I’ve never seen the surety markets impacted like they are now.”
So, what’s an individual or a company to do? Heck advises clients
to try to stick with their current carrier or broker.
“Relationships do count,” he says. “The accounts I’ve renewed have
been customers for years and years. Consistency is going to be rewarded
because they know what the history has been.”
William V. Poe is principal of Poe Communications, a St. Louis
advertising and marketing communications firm.
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