The Economy

Insurance Rate Outlook: From Flat to Soaring

Because of depleted investment income and $100 billion in natural-catastrophe losses for 2011, insurers are being more careful about the risks they...
Caroline McDonaldSeptember 18, 2012

Companies that have grown accustomed over the past several years to coasting through their insurance renewals in a flat market are now bracing for higher premiums on some types of coverage. In reporting details to their CFOs, risk managers are preparing earlier, providing more background on losses, and working with their brokers as underwriters scrutinize risks.

A long list of global natural catastrophes, generating losses estimated at more than $100 billion in 2011, and poor returns on insurers’ investments are pushing underwriters to be more careful about the risks they take on. More than ever, carriers are requiring explanations for losses and evidence of the changes made to prevent the losses from reoccurring.

Many insurance buyers planning for 2013 are seeing continued increases in the cost of most types of property-casualty insurance, with workers’ compensation and commercial-property coverage leading the way, says economist Robert Hartwig, president of the Insurance Information Institute. Through this year’s second quarter, rates generally increased 4.5% to 6% across commercial insurance programs, he says.

A company’s claims history and relationship with an insurer can influence contract negotiations. However, because insurers must now reflect the higher costs associated with catastrophe losses, even long-term, valued customers won’t be immune from pressure on rates, says Hartwig.

Jennifer Fahey, Aon’s chief broking officer, U.S. and Americas, says risk managers should be working toward a managed outcome. She warns that this is not the time for “packaging up your risks, exposures, and data and [shopping them around] the marketplace to wait and see what befalls you.” That is unlikely to work in the current market. She suggests instead that risk managers carefully prepare a counterpoint for their existing underwriters, explaining, in the case of losses, actions that have been taken to mitigate the exposure going forward.

Where the carrier has concerns about a business’s losses or the industry it’s in, bringing in experts, such as engineers, to speak on the company’s behalf about its exposure can be helpful, Fahey adds.

Supply-chain Troubles
The recent natural catastrophes have made it more difficult to get reasonable pricing for supply-chain coverage. But there are ways around that problem. Laura Langone, director of global risk management at Juniper Networks, a maker of high-speed routers, says the company hasn’t been hit with the increases it expected, mostly because of efforts during the past year to give underwriters “good visibility into our supply chain.” That includes allowing insurers to visit the suppliers.

She also has worked to pinpoint suppliers’ vulnerabilities and develop stronger alternate plans should they not be able to deliver materials or products.

Another reason for Juniper’s favorable outcome, says Langone, was the company’s history with its insurer. If the company were to switch insurers, there would be a big cost impact.

Langone notes that some companies “may be reluctant to share information on their supply chain or may not have great visibility, which could impact their ability to get the coverage they want.”

Blowing in the Wind
For its part, Centerline Capital Group, a provider of real estate and asset management services, is faced with double-digit premium increases, because much of the company’s capital is invested in wood-frame apartment buildings that are vulnerable to high winds, according to Lori Seidenberg, senior vice president in the enterprise risk management of the company. “That risk is not very sought-after,” she says.

But there is a lot at risk. Centerline has $9.3 billion of investor equity under management in more than 116 public and private real estate investment funds, according to Seidenberg. The company also manages $11.5 billion of loans in its mortgage-servicing portfolio on behalf of Fannie Mae, Freddie Mac, Ginnie Mae, and the Federal Housing Administration.

Seidenberg has created risk scenarios showing how certain aspects of the buildings’ designs mitigate the wind vulnerability, and promoted those to insurers. Still, “at the end of the day, when you’re in a class that’s not favorable, you are looking at premium increases, and a big reason is that some carriers have left that market. But we don’t have much of a choice. I can’t forgo wind coverage to save money, because investor guidelines and Fanny and Freddie guidelines require complete compliance.”

Seidenberg says that last year, the company’s insurance renewals ranged from flat to a 4% increase, which she attributes to relationships with brokers and underwriters and a favorable loss history.

Workers’ Comp Rise Expected
Then there’s workers’ compensation. Because of head-count growth, Veolia Transportation’s workers’ comp exposure increased in New York and caused a 25% leap in state tax assessments, says Richard Rabs, vice president of claims and risk management.

That pushed up the company’s overall premiums about 8% in July, double what the increase would have been without the higher assessment, he says. Also, liability went up 15% for its fleets of buses and cars, while rail liability came in flat.

Hartwig points out that 2013 will be the second straight year with workers’ comp rate increases. Pricing decreases had begun in 2004, and that trend held through 2011, “so the average company is still paying a lot less in premiums today as a share of its payroll than 9 or 10 years ago,” he says.

He adds that some risk managers may not be aware that persistently low interest rates affect pricing as well. With interest rates at 50-plus-year lows, insurers are earning far less by investing their income, and hence must charge more for insurance coverage.

Property Relief
One piece of good news for insurance buyers, Aon’s Fahey observes, is that even though property-coverage prices have started to move upward, “it remains a very manageable marketplace.” Increases are not across the board, but rather are based on a company’s own risk exposures and the industry it’s in.

Size also matters. While property premiums rose an average of 2.5% in the second quarter, they have risen 6.6% for the largest companies, Fahey notes. They would have gone up even more except for forecasts for normal hurricane activity through the rest of 2012. Also, losses for Hurricane Isaac were only $500 million to $2 billion, lower than anticipated.

Fahey points out that underwriters are looking particularly closely at any business with a large automotive or trucking fleet, as well as at the energy, chemical, and pharmaceutical industries. Carriers are requiring more information from such companies and industries and “really digging down into the risks and exposures,” she says.

CFO Involvement
Are finance chiefs paying attention to the price hikes? CFOs are much savvier in their understanding of the insurance marketplace than in the past, observes insurance and reinsurance consultant Andrew Barile. Because insurance has become a greater expense for corporations in recent years, risk managers more often give detailed presentations to their CFO and treasurer.

“But one thing that has changed in the buying process is that buyers no longer depend on one broker but may have a number of brokers for different lines of coverage,” explains Barile. He adds that corporations are more concerned about how much they spend because they are not bringing in much investment income. “CFOs are paying attention. When the risk manager comes in with a recommendation, he or she has to have detailed explanations of why rates have gone up,” he says.

Because insurance is such a “huge expenditure,” Veolia’s Rabs has regular meetings with his CFO to make sure there are “no surprises.” While Rabs has binding authority over insurance, “if it’s a huge increase, he’s going to know about it before” the deal is done, he says.

Langone says she meets regularly with her CFO to discuss strategy and get input before purchasing. “So far, so good,” she says, since she’s looking at flat rates to decreases in October.

Seidenberg adds that her company’s new CFO, formerly its treasurer, is “actively engaged in the buying process, not only in the premium, but also in the coverage and benefits to the organization.”

At Centerline, board members’ opinions are considered before changes are made to directors’ and officers’ liability coverage, and the board is also informed about insurance pricing upon budget reviews, says Jessica Maldonado, director of enterprise risk management.

With regard to the company’s professional-liability program, Maldonado meets with the company’s chief executive; its CFO; and its heads of the mortgage banking, asset management, and affordable housing debt units to stay informed of strategic business operations. For her part, she provides information about such things as upticks in threatening litigation or insurance claims and whether levels of coverage are adequate.

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