Prices Rising, Covers Shrinking For 2002
New York City
In a wakeup call for commercial insurance buyers, risk managers and other business executives were warned by one top brokerage to expect sharp increases in their insurance premiums and maybe less coverage for the price.
Chicago-based Aon brought its seminar series, entitled "The New World of Risk," to New York City with that clear, unhappy message for clients.
For now and the foreseeable future, rates will be substantially rising throughout the property and liability lines, ranging from a low of 20 percent to as much as 600 percent on some lines and particular risks, Aon managers said. The sharp hikes are being prompted by a combination of the terrorist attack of Sept. 11, years of unprofitable underwriting and declining capacity in some lines of business, Aon explained.
The biggest issue facing brokers and insurance companies right now is the future of reinsurance, noted Aon. The problem, according to the brokerage, will not be capacity, because companies are being formed to meet that need, but instead will stem from the losses suffered in the Sept. 11 attack and the reinsurance markets own unprofitable underwriting over the past few years.
The insurance market was beginning to harden in the range of 10 to 40 percent even before the Sept. 11 catastrophe, noted Lawrence Geneen, senior vice president, managing director for Aon in New York.
Insurers, he explained, have experienced losses on their underwriting for the past 10 years, but were able to make profits through investments. However, for the first six months of this year, Mr. Geneen continued, companies did not make money as the equity markets soured, prompting the need to reexamine their underwriting criteria.
With the events of Sept. 11, those problems were exacerbated, as the latest estimates put the total industry losses at $70 billion or more, said Mr. Geneen.
"It is the first time the insurance industry has been hit in so many areas by one claim," Mr. Geneen observed.
There are other pressures contributing to the increases. Speaking on casualty lines, Paul Smith, Aon's managing director for casualty, said rising healthcare costs and the continued upsurge in litigation, especially related to auto, are driving up premiums.
The combined ratio on workers compensation is estimated to be at 119 this year, said Mr. Smith, using figures from the National Council on Compensation Insurance to illustrate an unprofitable forecast. Healthcare costs are rising at almost double the rate of the Consumer Price Index and jury verdicts are double to seven times what they were in 1993, he added.
In looking for property coverage, the increases might not be as bad, said Gary Marchitello, managing director of Aon's global property group, but he warned that another big loss could radically upset the market. Clients can expect increases in the range of 25 to 200 percent, with exclusions for terrorism and greater retention by clients.
"Prepare management," advised Mr. Marchitello. "The numbers we see are pretty horrible."
Prior to Sept. 11, clients seeking directors and officers and employment practices liability insurance could expect premium increases of between 10 and 25 percent with greater retention, explained Jennifer Fahey, managing director of Aon's financial services group. All of that has been "accelerated" after Sept. 11, she added.
There will be no multi-year packages sold this year, and clients can expect to see higher retentions, in some cases as high as 50 percent, Ms. Fahey advised.
Aviation is "in the same ball of wax as everyone else," reported John Andrews, senior vice president of aviation for Aon. He described the line as "very fluid" and warned that the Jan. 1 treaty reinsurance renewals will have to be watched very closely to determine their effect on the market.
However, Patrick Rastiello, senior vice president of Aon Re in Dallas, said there is some hope for the future. "Patience is the key," he said. "There is good news on the horizon."
Prospects should improve as premiums rise and capacity for insurance and reinsurance expands, Mr. Rastiello said. This includes the creation of several markets, such as Aons Bermuda-based Endurance Specialty Insurance, Ltd.
Currently, there is a total of $14 billion of capacity committed to the market from new facilities, according to Mr. Rastiello. He predicted that the current hardening atmosphere would last two years before stabilizing.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 17, 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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