CGL Premiums Sure To Rise Due To Cut In Supply, Rise In Demand

Similarly, Elaine Trischetta, executive vice president of casualty group and specialties in the New York office of Zurich North America, said that "given the recent events I would expect that the hard market will continue for the foreseeable future." However, she stressed the difficulty in trying to estimate how much the rate increases are likely to be.

William C. Wilson, director of the Alexandria, Va.-based Independent Insurance Agents of America's virtual college, said he has heard predictions of 200 percent to 300 percent rate increases. However, he personally doubts that the basic rates for general liability will rise by that much.

He said that "poor experience" was why CGL rates were climbing even before Sept. 11. According to Mr. Wilson, the insurance industry has been "so competitive for so long" that it finally realized that it "can't survive on investment income alone." Therefore, the general increase in prices reflects "more stringent underwriting," he said.

Mr. Wilson expressed another truism advocated by all of the experts: "The reinsurer marketplace in large part controls the availability of insurance."

"One of the biggest cost-drivers for insurance sold through primary insurance companies is the cost of reinsurance," agreed Robert P. Hartwig, vice president and chief economist for the New York-based Insurance Information Institute. "That's the wild card–how will reinsurers react."

According to Ms. Trischetta, "with accumulation of catastrophe losses, we're going to find that people suffered some severe losses–reinsurers especially." Then, "as the upcoming treaty [reinsurance] renewal takes place, we could anticipate that capacity will shrink and rates" will rise, she said. This in turn "will be reflected in renewal terms that the direct carriers will be issuing."

Ms. Farrell believes that even if reinsurance costs rise, the primary insurers will end up absorbing some of that cost because they will not be able to pass all of it on to their customer base.

Nevertheless, Mr. Wilson said that unless "there is another series of these types of attacks, the industry is in pretty good shape–but I think it will get tighter."

Mr. Hartwig noted that the "significant tightening in the reinsurance market" is due to the fact that "a non-trivial piece of the claims-paying capacity of the global reinsurance system is now committed" to paying claims arising from the Sept. 11 attacks.

Along with this "decrease in supply" there "very likely" will be an increase in demand, he continued. In basic economics terms, these combined factors translate into higher prices, he observed.

Ms. Trischetta explained that the increase in demand will result from policyholders re-evaluating their coverages. "I think that terrorism has caused people to take a second look at their insurance programs," she said, adding that risk managers are likely to decide that they want higher limits and increased capacity.

Mr. Wilson agreed, noting that past studies have consistently shown that businesses tend to be under-insured, not over-insured.

Policyholders also can expect "reduced coverage, if it's available at all for certain types of risks," Mr. Hartwig declared.

A.M. Best's Ms. Farrell stressed that "program structures" are likely to "change such that there will be increased exclusions and caps," as well as higher retentions.

As observed by Ms. Trischetta, "as [reinsurance] treaties become more restrictive, direct policies will become more restrictive."

Mr. Hartwig suggested that there could be "differences in coverage terms by region." This could occur because of the perception that urban settings, which may have "marquee-type landmark buildings," are more likely to be targeted by terrorists, he said.

However, he indicated that the premiums charged will not be arbitrary because they will be "actuarially determined."

Ms. Trischetta agreed, emphasizing that "every risk is evaluated on a case-by-case basis" before an insurer can determine an adequate renewal rate. "We take a look at how a company has performed, what kind of loss they have generated in the past and what kind of limits they're looking for as well as attachment points," she said.

The experts do not expect significant policyholder resistance to increased rates and more restrictive terms.

"Based on how this year has gone even prior to Sept. 11, I think that they do understand why rates have gone up," Ms. Trischetta said.

She added that the soft market was "around for a very long time" and that rates decreased continuously over the past 10 years. "It took a little bit of adjustment for risk managers to get used to paying more for a renewal but that seems to have taken hold now and we don't find resistance very strong at all."

Similarly, Mr. Wilson believes that policyholders "are in a mindset right now where they're more willing to understand the reasons behind rate increases."

He added that there is no "real cause for concern, at least in the short run," for the agents who write CGL business.

"For most small and medium-sized businesses, which are the bread and butter of most agents, I don't think there's an immediate problem," he continued. However, he suggested that it could be difficult to acquire adequate limits for "very high, concentrated risk exposures."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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