Insurance industry losses drive up coverage costs

Richard Ollis is president and CEO of Ollis and Company, an employee-owned insurance agency.

The insurance marketplace continues to be tough and 2003 doesn't look much better. Pricing continues to rise and availability of coverage is being restricted. Unfortunately, these factors will continue well into 2003 and probably 2004.

Many feel the World Trade Center disaster is driving the market. The WTC disaster resulted in an estimated $50 billion in losses, making it the largest loss in history. This event reduced the capacity of the marketplace, but it had an impact greater than just financial. A negative emotional outlook of potential claims is creating fear and uncertainty in underwriters. Natural disasters that used to be fairly predictable have changed into a fear of the unknown and unpredictable.

Losses continue to outpace premiums collected and expenses of insurance companies. Although frequency of claims is down, severity is rising. Large jury awards, rising medical costs and attorney involvement are impacting the size of claims. Our society and legal system are no longer satisfied with putting people back to a similar pre-injury position. Millions are being awarded to injured parties based on future issues they may face. Jury awards, such as the multimillion dollar award for hot coffee spilled by a woman going through the drive-through at McDonald's have and will continue to impact the insurance industry.

In past years, the industry essentially made its return by investing its cash-flow in the stock and bond markets. Because of poor performance in these markets, insurance companies have to make money by collecting more premium dollars in relationship to claims and expenses paid. In 2001, the industry lost money, even after accounting for investment returns. In the first quarter of 2002, the industry returned to profitability after investment returns. Unfortunately, this modest profit won't be enough to turn the market for the positive.

One additional factor impacting the insurance marketplace is the increasing cost of reinsurance. Insurance carriers actually buy insurance on the policies they issue. On a $1 million liability policy, a carrier might purchase reinsurance on the coverage they provide in excess of $500,000 so that they limit their exposure to the first $500,000 of coverage. Reinsurance costs are rising from 50 percent to 900 percent, making it more difficult to attain profitability.

So what's the outlook for 2003? The Kiplinger forecasting report estimates property and liability rates will rise by 20 percent to 50 percent. Professional liability, directors and officers and fiduciary liability estimates are even higher at 40 percent to 75 percent, partially a result of the Enron, Tyco and WorldCom scandals. A Merrill Lynch survey of insurance brokers across the United States suggested current price increases in commercial lines were running between 20 percent and 50 percent.

In the future, coverage will be more difficult to obtain with terms and conditions of insurance contracts being restricted. Underwriters will require more data and will look more closely at accounts. High hazard types of businesses will find coverage difficult to obtain. Be prepared to provide additional information, financial statements and more detailed loss information.

The best approach

What's the best way to approach this marketplace?

Start preparing for renewal well in advance (90-120 days minimum).

Provide your broker with information about safety programs, policies and procedures, financial statements and detailed loss information.

Focus on risk management. Implement light duty programs, safety incentives and investigate all accidents to see how they can be prevented in the future. A well-managed company will be able to obtain better pricing.

As we look into the future, pricing and coverage availability will depend on the insurance industry's return to profitability. Investment returns, catastrophic losses and our legal system will all affect when the market turns. But for now, prepare early and provide information that will paint your account in a positive light.