VideoMuch has been made of the losses insurers are taking in the wake of September's terrorist attacks. According to some estimates, the industry could lose almost $60 billion, making them the most costly disasters ever. The previous record of $20 billion was set by Hurricane Andrew. In turn, insurers have been quite clear that Corporate America will share in their pain. Says Carl Roth, managing director at insurance broker Willis Risk Solutions in New York, "For many classes of insurance, there will be a sharp increase in rates of such significance that people have not seen before. This will be the classic hard market magnified several times."
But sharing in the pain won't mean just paying higher premiums — companies have already seen double-digit increases in those this year. For some, it may mean seeing restricted coverage, and for most, it will mean taking on more financial risk.
Although for much of the past decade insurers have provided 100 percent risk-transfer financing in such lines of insurance as workers' compensation in order to gain business, that strategy has been greatly curtailed. And the idea of offsetting higher premiums with higher deductibles (called self-insured retentions, or SIRs) may no longer be a corporate choice.
That latter trend, in fact, was in motion before the terrorist attacks. According to Chris Treanor, head of global brokering at New York-based insurance broker Marsh, deductibles had been doubling and more across the board this year. "Even prior to September 11, if a company had a $10,000 SIR at its last annual [policy] renewal, chances are it would be $25,000 this renewal," says Treanor. "If it was $1 million, it was likely to be $2 million, and so on. And if there was no SIR or deductible last time around, there would likely be one this time around." And there's no doubt, says Stephen Lowe, managing principal of product development at Tillinghast-Towers Perrin, that next year "there will be pressure for those deductibles to move up further."
Reversal of Fortune
Vinnie Marzano felt the pressure early on. The vice president and treasurer of New York-based Scholastic Corp. recalls that in the 1990s, the children's publishing and media company was the beneficiary of giveaway insurance prices. Its workers' compensation insurer was so eager to retain the company's business that it waived the usual $200,000-per-claim deductible and even lowered the premium by 35 percent. "We had a great deal," recalls Marzano.
This past February, however, Marzano had to tell CFO Kevin McEnery that "the good days," as he terms them, were over. Although Scholastic's losses from workers' compensation had not changed as a percentage of payroll, the insurer, New York-based Atlantic Mutual, insisted on a deductible of $250,000 per claim. It also hiked the price of the policy by 60 percent to 76 percent, depending on a formula assessing Scholastic's loss experience.
Marzano shopped around for a better deal — to no avail. "To get the same 'no-deductible' policy would have cost an additional $800,000 a year, quite a bit more than I was willing to spend," he says. "Either we took on more risk through the deductible or we'd pay through the nose."
Marzano's dilemma is symptomatic of the return of the hard insurance environment. During the bull stock market, insurers competed by pricing their products lower while simultaneously absorbing more risk, figuring their investment income would pick up the shortfall. Robert Hartwig, chief economist at the New York-based Insurance Information Institute, contends insurers went too far, pricing their policies well below expected losses. When the market became a bear market, the investment income to pay losses dissolved. "Record catastrophe losses didn't help, either," he says.
Meanwhile, the losses that came in had much higher dollar values than was anticipated. Claim settlement costs for directors' and officers' liability insurance, for example, is up from an average $7.5 million four years ago to $14 million today, according to Steven Anderson, managing director of Marsh's FINPRO unit. Other tallies include a doubling of general business negligence claim costs from $759,000 in 1993 to $1.7 million in 1999, an increase in premises liability (so-called slip-and-fall cases) claim costs from $324,000 in 1993 to $457,000 in 1999, and a fivefold increase in product liability claim costs from $1.4 million to $7.4 million during the same period.
After the events of September 11, those losses are only going to increase. And what's different about the new claims, says Lowe, is that they cut across multiple lines of insurance, from property and casualty to workers' compensation to life insurance. Moreover, their catastrophic nature will cause first reinsurers and then primary insurers to further evaluate "the limits of insurance they offer" as well as the financial risk they will assume. The result, says Lowe, could be an insurance environment in which "buyers don't have much ability to negotiate."
To Sir, With Love
In the soft market, buyers often used their negotiating power to secure higher SIRs, reasoning that it made more sense to pay low-value risks out of cash flow than to pay an insurer. Several large companies accepted even higher risks.
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