Property owners riding out rates in insurance cycle

After three successive years of rising property and casualty insurance rates, local commercial property owners are wondering when the hits will stop. With local rates skyrocketing as much as 70 percent, relief is needed.

According to local insurance professionals, the price battle is only halfway over.

Dick Jackson, president and CEO of the independent Springfield insurance agency Barker Phillips Jackson, said the hard market, which is following a historical cycle, is expected to subside by 2005.

But that doesn't help property owners who have been trying to absorb large renewal rate increases since 2000. Some rate spikes have been as high as 150 percent nationwide, mostly in the casualty lines, insurance analysts say.

Locally, the impact has been less severe, but hard-hitting nonetheless. The fact that Wooten Company's director Karen Cowan views the multifamily property management firm's 19 percent increase as "lucky" tells the tale.

"I know a lot of people in our industry experienced considerably higher (increases) than that," said Cowan, who has $79 million of insured property in 3,000 units.

For instance, John Q. Hammons Hotels Inc., which insures $1 billion in assets among 47 hotels, saw renewal rates rise 70 percent this year, said Pat Shivers, the public company's senior vice president and corporate controller.

And Ron Shepherd, property manager for Warren Davis Properties' $50 million worth of insured property, dealt with a 40 percent increase this year and expects another 25 percent hike when he renews next month.

"And you're settling for higher deductibles," Shepherd said. "So you're paying more premiums and getting less benefits. Everybody I talk to in this industry is pretty much in the same boat."

These rough waters were expected, according to Jackson, based on the industry's five- to seven-year pricing cycle.

"By historic standards, this hard market has hit middle age," Jackson said.

Historically, three or four years of rate increases follow three or four years of rate cuts. But Jackson said the market hasn't been hit this hard since 1986, largely because this cycle is coupled with a national recession, stock market woes and huge losses in the industry.

"The insuring public has had a bargain for the last decade and a half," he said.

Jackson said the rate climb began in 2000, nearly a year prior to the 9-11 terrorist attacks that rocked the insurance world denying the claim that 9-11 is the root of the rate increases. The attacks merely heightened already growing rates.

"Nine-11 was the apocalypse that really threw everything into turmoil," Jackson said, and the estimated $50 billion loss has not yet been recovered.

Immediately following the World Trade Center collapse, rates increased between 10 percent and 30 percent, according to Randy McConnell, spokesman for the Missouri Department of Insurance.

"That was largely the product of loss of investment income because of the collapse of the stock market," McConnell said.

Most of the WTC damage is being paid for by reinsurance companies, McConnell added, sending a ripple effect through the entire insurance economy.

"Reinsurance became a dear property," he said. "Even though there has been an inflow of several billion dollars into reinsurance since 9-11, there were reduced capacity and increased prices for a considerable period of time.

"Many property insurers, both personal and commercial, report increases for their reinsurance of 50 percent. Reinsurance is an important element. When you see that, it does apply upward pressure on rates."

While reinsurance has seen additional capital, standard insurance capital has diminished, Jackson said. Availability of nonlife insurance dropped 25 percent as the industry's capital dipped from $920 billion to $690 billion over the last two years.

"Insurance is a commodity just like gasoline and soy beans if there is less of it available, you pay a higher price to get it," he said. "This is strictly a rate function of availability."

Adding to the lack of capital, insurance companies are shrinking the available lines in the marketplace.

"You probably have about half the availability you had before," Jackson said. "It's not just because all of that money has gone out of the market, per se, companies have changed their underwriting attitudes towards certain classifications within the industries."

Basically, he said, if a line is not making money it is likely to be dropped, limiting the number of quotes brokers can obtain.

The brunt of these losses falls on property owners, forcing them to take on increased deductibles and decreased limits. Some are even reluctant to make claims in such a market.

"Last year we absorbed some stuff that was a little bit more than the deductible because we didn't want to make a claim that might be held against us," said Kirk Heyle, a local property owner and real estate adviser.

Shepherd is taking the same approach: "It has eliminated any small claims because our deductibles have gone from $1,000 in 2000 to $10,000 in 2001," he said. "Your premiums go up and your benefits go down. You're almost being self-insured on anything small."

As veteran customers, property owners feel like they deserve better. But until the market begins to level, there aren't many options for underwriters, Jackson said.

Reports show that losses continue to outpace premiums collected and expenses of insurance companies. According to Jackson, the industry spends $1.06 on every $1 paid in, for a 106 percent combined ratio.

"They're going to have to get back to at least 100 percent combined ratio," he said, before increases stop.

Just as a combination of events caused the market to stumble, it will take successive events of similar stature to turn it around which may not happen for a couple more years, Jackson said.