Insurance Market Softness to Continue
In the insurance vernacular, a soft market is music to a CEO's ears. It means rates for business coverages either are dropping or moderating, as they sometimes do in economic hard times. Such a market now exists, but what does it mean for other aspects of business insurance: liability limits, deductibles, and coverages? In this look at the insurance market, IB spoke to insurance executives about four key business coverages: property, casualty, director's and officer's liability, and employment practices liability.
Of the various components of insurance, rates are the most variable, in part because they are so closely linked to risk and exposure. In a soft market, there is a lot of competition for the business of prospective insurance clients, which creates good deals for the individual customers. At the moment, consumers get more coverage for less premium. In contrast, a hard market is when the carriers are in control, and they command higher rates.
Aon Corp., a risk management and insurance brokerage firm, is forecasting a rate drop of 5% to 15% for most property risks, and it predicts that most insured parties will keep the same limits and deductibles. But favorable rates do not mean that insurers are not underwriting or qualifying the risk, according to Rob Fleming, a vice president with Aon.
A soft market might be a "consumer's market, but Fleming detects a distinct difference between this soft market and past soft markets. In the past, he said insurers might not have underwritten or qualified the risk. Today, however, the market's declining prices still assume a good risk; if a customer has a substandard risk, it is likely the result of a geographic reason — it is prone to earthquakes or hurricanes — or the insured is making a high-hazard product with a high loss history.
"If a customer is a substandard risk, they will continue to be difficult to place insurance with," Fleming said. "Insurers will still look at the quality of the risk before approving a rate reduction."
Gary Klein, assistant vice president for NSI, a division of West Bend Mutual Insurance Company, believes the industry is at the bottom end of the soft market, meaning pricing is as low as it's going to get. "I've read some industry publications that basically say the rates being used now are as low as rates from 2000-2002, so I do think we're at the bottom of the soft market," he stated. "There are some indications the market will remain soft for another 12 months, and then we're going to start seeing an upswing in rates."
Tommy Dunn, who is in charge of the Wisconsin Region for IMA Financial Group, sees future rates differently. "We have very few of our clients hiring right now," he said. "That will continue to make this market in property-casualty very soft, and carriers are bidding against each other tremendously to keep people's business."
Klein, who expects insured parties to keep the same liability limits, gets a common question about limits, and his answer is a practical one. "I say it's whatever you can afford," he counseled. "There is nothing really set in stone. You can have somebody with property or assets worth $150 million. Should they carry $150 million in an umbrella coverage? Probably not."
According to Klein, most property accounts carry a $500 deductible, but there are cases where insureds would take a $1,000 or $2,500 deductible — including organizations with past loss issues and those with specialized equipment. The problem with a higher deductible is there is not a huge savings. "If you have, on average, one claim, you might break even," Klein said. "If you had two claims, you're probably going to lose money."
With this line of insurance, businesses that maintain a favorable loss history always have an advantage, and such organizations are likely to benefit from flat to single-digit rate increases. As always, companies with an unfavorable loss history, or negative changes in exposure, can expect the opposite.
In general, the rate picture is the same as it is on the property side, but in Klein's view, a number of things could trigger a rate increase, including declining industry profits. "We as an industry have milked the rates down to the point where we're simply not making as much money," Klein noted. "A lot of companies are losing money, so when everyone looks at their year-end financials, they are going to say, 'We've had enough.'"
Jeff Grace, a president with IMA Financial Group, sees the industry in healthier terms. He said there is a lot of equity in insurance companies because of recent underwriting results — the relative lack of recent catastrophic events, not including the Gulf oil spill — and improved returns on their investments. "There is plenty of capacity available," Grace added, "and certainly on the casualty side as well." Capacity refers to an insurer's ability to assume more risk and establish larger liability limits.
Others anticipate that insureds will maintain current casualty limits and deductibles. "I would say on the casualty side, as the market starts to harden, you will see some people maybe scaling back on their umbrella limits," Klein predicted. "So instead of having $5 million, they may go to $3 million, but I don't anticipate that for another 12 to 24 months."
Director's & Officer's Liability
Another soft market, "D&O" liability, will likely come with flat to single-digit rate increases for most insureds, with little change in limits purchased this year, according to Aon. The company reported that only 49 D&O cases were filed in the first four months of 2010, and the number of federal securities class-action lawsuits was 27% lower than in the first four months of 2009, when 67 cases were recorded.
Before the recession, a publicly traded company's exposure was greater because of the growing trend of shareholder lawsuits. That's the very reason that very few carriers would like to hold British Petroleum's D&O coverage at the moment. "You have shareholders that are losing money and now they are upset and they end up bringing a lawsuit, and BP is a good example," Klein said. "It would seem logical that that would happen because you're going to have shareholders that are completely upset with what has happened to the stock price."
Overall, D&O is another line that's in a soft-market holding pattern. "Anytime you get more coverage for less premium, it protects the company at higher limits, so it's very important to cover the D&O liability for those owners," Dunn said.
Employment Practices Liability
"EPL" is a market that is favorable across industries, but due to a continued shortage of primary carriers in the U.S. market, Aon reports that employment practices liability still is "potentially volatile" for larger employers — those with 10,000 or more workers. Aon also is detecting an uptick in filings for class-based actions, a trend that is likely to continue through the remainder of 2010. That's unlikely to impact rates this year due to the length of time it takes for EPL claims to impact insurance carriers.
While NSI also has seen an uptick in the number of claims filed, it has not seen an increase in awards — a trend Klein attributes to more labor-savvy small employers. "We haven't paid out more than what we normally do," he said. "I think that speaks to a lot of employers that are better at hiring and terminations. They better understand the law, whereas 10 years ago they may not have had a formal HR department, and now they do, so I think society is doing a better job with employment practices."
Incredibly in Klein's view, there still are organizations that do not carry EPL coverage, even in a slow economic period where downsizing decisions are challenged. "It's just a matter of time before someone makes the allegation that you did something wrong," he asserted. "It can be very expensive to defend on your own."
In terms of low rates for employment practices liability, Klein doesn't see anything changing over the next couple of years, unless the federal government or state governments come out with new rules or regulations that drive up the cost.
Most insurers recommend an annual review of insurance policies to make sure coverages are adequate, especially in a low-rate environment. Those reviews should be more frequent with a major operational change such as expansion, merger or acquisition, divestiture, or the construction of a new facility. Another review trigger is international sales or facility expansion, as most standard policies here cover only the United States and Canada, which is the top export destination for Wisconsin products.
As part of that assessment, businesses should investigate emerging lines of insurance to protect against new threats. Cyber liability insurance is a relatively new type of coverage that addresses incidents where someone sends a virus-infected e-mail attachment that compromises a computer network, or in cases where a computer system is hacked into and sensitive financial or credit card information, or personal medical information, is stolen. "Companies are not really familiar with what kinds of claims are going to come from it," Klein warned. "There are some insurance companies out there that will offer cyber liability coverage, and it varies from company to company as to what is actually covered and what is not."
Another new line is "green" coverage. and Klein explained how it might be applied. "If you own a building and you have a loss, the city might require the building to be 'green,'" he said. "Under an unendorsed policy now, a property policy, there is no coverage for that. Some companies are experimenting with different types of green insurance forms, and it's allowing the insured the ability to rebuild the building so that it's so-called 'green.'"
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