Study Sees Lower Limits, More Exposure

NU Online News Service, Sept. 2, 1:12 p.m. EDT?Many businesses trimmed back their liability coverage last year, widening the gap between their potential risks and the amount of insurance they carry, according to research by a New York insurance brokerage.

The findings were made by New York City-based Marsh, based on the insurance buying decisions of 4,329 companies during the 12-month period ending Jan. 31. The study looked at insurance purchasing by various industries in the United States and elsewhere.

Marsh said its "The Limits of Liability" report found that all businesses covered in the survey trimmed their insurance limits by an average of 9.4 percent.

The reduction, Marsh said, is likely the result of rising insurance costs and generally soft economic conditions.

The firm noted that the average cost for liability insurance increased 63 percent during the period covered by the study. Other lines of insurance also rose significantly.

According to the study, U.S. businesses with revenues exceeding $10 billion purchased limits of $335 million on average, the greatest amount of coverage of all firms in the study. This was about the same as in the prior-year period, Marsh said.

Mid-size businesses, revenue of $201 million to $1 billion, reduced their limits by more than 11 percent to an average of $62 million.

The smallest businesses in the study, those with annual revenues of $200 million or less, reduced their limits by an average of 18 percent, to average limits of $37 million, accounting for the sharpest decline.

"The current economic climate makes this a particularly challenging time for organizations seeking to manage or transfer their risks," said Timothy P. Brady, a managing director of Marsh's national casualty practice in a statement.

While firms are trying to do some belt-tightening, Mr. Brady said, "claim costs are rising unabated. In addition, it's important to recognize that businesses are buying insurance today to cover losses they might have to pay in 2008 or later."

Mr. Brady explained that it can take a lawsuit five years or longer to work its way through the court system, so a large claim brought today may not be settled until 2008. In light of rapidly rising costs, he noted, the resolution of a business' claim five years into the future might be far more costly than what the business might anticipate now.

For instance, the cost of health care benefits, a major driver in the calculation of awards in personal injury lawsuits, rose an average of 14 percent in 2002, continuing a trend of annual double-digit increases, Marsh pointed out. In addition, the cost of a wrongful death suit nearly tripled between 1994 and 2001, and this cost is continuing to rise, the firm said.

A notable exception to the general trend of businesses reducing their liability limits, the study found, was with U.S. businesses that experienced losses of $5 million or more in the past five years. These businesses maintained their insurance levels, while those not sustaining such losses reduced their coverage by about 22 percent.

"Experience is a great teacher," Mr. Brady noted. "Firms that have sustained large liability losses perhaps recognize they're vulnerable to a significant claim and will pay the additional premium now required to maintain their level of protection."

Marsh said that in fact, businesses that have sustained large losses in the past five years purchased limits of $207 million on average, more than double the level of protection bought by those businesses without such losses.

The study examined trends based on insurance purchases of businesses in several parts of the world, the broker said.

Included in the survey were 2,726 firms in the U.S., 1,003 in Europe, 284 in Latin America, 272 in Canada, as well as companies in Puerto Rico and Australia.

On average, firms based in the U.S. purchased limits of $87 million, while non-U.S. firms purchased average limits of $47 million. Overall, average limits purchased in Europe fell by 21 percent as the average cost for liability insurance there rose by 82 percent, said Marsh.

Among other findings, Marsh said that U.S. firms in the chemical and pharmaceutical industries purchased limits of $190 million on average, the highest among all industry groupings. Next was the mining and energy sector at $144 million, followed by transportation equipment at $128 million, and electrical equipment and instrument manufacturers at $98 million.

Rubber and plastic manufacturers, which tended to be smaller than other industries in the study, purchased limits of $44 million, the lowest among industry categories. Construction firms purchased limits at $50 million.

Copies of the report are available through local Marsh offices.

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Study Sees Lower Limits, More Exposure

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