Smaller Companies Buy Lower Limits
Whether its the economy or rising premium rates to be blamed, smaller commercial insurance buyers are dropping their liability limits and opening themselves up to absorbing bigger losses.
That finding was part of an annual research report, "Limits of Liability 2001: Divergence," by New York-based insurance broker Marsh. The study examines the liability limits purchased by more than 2,600 companies in the United States, Canada and the United Kingdom.
Also in the study is a special report from the National Law Journal on the largest awards given in civil suits in 2000, along with a list of major losses broken down by industry supplied by XL Insurance Company, Ltd. of Hamilton, Bermuda, to be used as benchmarks by corporations.
This years report, the ninth annual, turned out to be a surprise, observed Tim Brady, managing director at Marsh. Industries broke a five-year trend of increasing their limits in the wake of rising settlement costs, he said.
The 1,381 companies classified as small, with revenues up to $500 million, decreased their average limits by almost 9 percent, the report said.
Larger corporations, however, did not follow suit. The 792 companies with revenue ranging from $501 million to $5 billion maintained their limits at last years level, while the 213 corporations with over $5 billion in revenue increased their limits more than 5 percent from $298 million to $314 million on average.
Overall, purchasing limits are viewed as "flat" for 2000, the report said. Average limits were reduced by 3 percent–from $105 million to $101.8 million. The report said small and mid-sized companies accounted for the entire 3 percent. Last year, the overall average was an increase of close to 6 percent.
Mr. Brady said the speculation is that smaller companies are feeling the pinch more from the economic downturn and higher premium levels than are larger firms. He said it was too early to tell if this is a trend, and added that the effects of the Sept. 11 terrorism losses on limits are as yet unknown. The report was completed before the attacks too place.
"We are waiting to see what happens," observed Mr. Brady. "Sept. 11 is too raw to extrapolate where we are headed."
The main purpose of the report, pointed out Mr. Brady, is to give the insurance industry and risk managers an idea of what is happening in the markets and what others are purchasing.
Looking deeper at the report, Mr. Brady explained, one finding that stands out is that those who have experienced losses are buying higher limits.
The surveys focus on losses was primarily concerned with jury awards, using a $5 million and above figure as the benchmark for "large" verdicts. The report said there was a 10 percent increase in the number of companies that faced large jury verdicts. The number grew from 8.5 percent to 9.3 percent for 2001.
Noting the drop in liability limits purchased by small companies, the Marsh report suggests that the 897 companies surveyed with revenues below $200 million have a one-in-20 chance "of suffering a $5 million loss over a five-year period."
The report concluded that companies that have experienced a loss of $5 million or more "have a sharply different philosophy toward the value of risk transfer." Those companies seek higher limits as opposed to those that have not had the experience and lowered their limits.
Recent events could also change the future calculations on liability limits as companies take into account that their losses could be more substantial than the limits, Mr. Brady pointed out. Companies might determine their exposure to catastrophic loss is greater than they originally thought and seek greater insurance protection from economic hardship.
New to the report were surveys of companies from both the United Kingdom and Canada.
In the U.K. the average liability limits rose 21 percent, from $179 million last year to $216 million in 2001. The number of companies suffering a $5 million loss rose from 7.9 percent last year to 12 percent this year.
In Canada, average limits were $91 million, and 4.8 percent of companies surveyed suffered a loss of $5 million or more over the past five years. The report said this was the first year for a survey of Canadian buyers, so there were no figures to make a comparison to.
Next year, Mr. Brady said, plans call for the survey to be "broadened in breadth" with more countries added.
Copies of the report are available through local Marsh offices.
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.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.