Risk Management

The Feast is Over

CFOs face double-digit hikes in property-casualty premiums as the insurance industry boosts its financial performance.
David KatzNovember 1, 2000

After years of serving up banquets of low- priced coverage, the property-casualty insurance business has decided to close the kitchen door and improve its results.

CFOs can thus expect to see double-digit premium hikes in many lines of coverage as their organizations negotiate their insurance renewals.

In its quarterly conference call with analysts next Monday, The St. Paul Cos., will, for instance, report increases of 12% to 15% in its general business-insurance lines, including general liability, property and casualty coverages, according to St. Paul CFO Paul Liska.

“We are projecting continued strong price increases in standard commercial and specialty lines,” Liska tells CFO.com. In fact, he sees the premiums of at least one specialty line, medical malpractice liability coverage, “catching up to standard commercial and even passing it. These jury awards are just out of sight. You can’t price [coverage accurately] if you lose a $50 million award.”

How should his fellow CFOs respond to the hikes Liska’s company and other big carriers are dishing out?

The low prices of the last few years were “unsustainable” by the insurance industry, the St. Paul CFO replies. “If your pricing isn’t going up, I’d ask myself who my insurer is, and why [that insurer] is able to do it” when most others aren’t.

The price of insurance coverage is “not a bargain if your claim isn’t going to be covered,” he says.

The current climate will force CFOs to focus more directly on insurance issues, according to Liska, who served as president and CEO of Specialty Foods Corp. before joining St. Paul in 1997. He’s also been a CFO of Kraft USA. In his stint in the manufacturing sector, Liska says, he learned that senior financial executives there tend to put insurance issues on the back burner, often relegating them to risk management specialists.

Now, however, “vast increases in [the] severity” of such exposures as suits against directors and officers demand closer attention to risk management and insurance issues by CFOs, he says, urging his peers to “take an active role and make sure you’re adequately insured.”

Nevertheless, availability of coverage doesn’t seem to be the threat to commercial insurance buyers that it was in the last hard market of the mid-to-late 1980s. During that period, carriers completely stopped writing certain lines of coverage, and corporations increasingly self-insured or resorted to other alternative-risk-funding vehicles. Today, there’s too much surplus underwriting capacity around for that to happen, Liska and other insurance industry players believe.

There remains, however, the matter of those premium hikes.

Following a seemingly endless soft market that hit the financials of the p-c industry hard, signs of an outbreak of pricing sanity—from the industry’s point of view—are becoming widespread.

Chubb Corp., for instance, is reporting average premium hikes of 12% to 13% in standard commercial lines, says Gail E. Devlin, a senior vice president with the Warren, N.J.-based insurer.

“Month by month, they’ve been going up, up, up,” she observes. “That upward momentum may level off, but the rate increases will continue.”

As is the case with other p-c carriers, Chubb’s hikes, which have included premium rises in workers’ compensation, commercial multiperil, general liability commercial auto and excess auto lines, have contributed to a surge in net premiums written. Last Friday, Chubb reported that for the third quarter, its net p-c premiums written rose 10.1% to $1.6 billion. Premium growth in the United States was 11% for the insurer. Reported premiums outside the United States were up 6%; in local currencies, they were up 19%.

“Overall premium growth was outstanding, reflecting both new business and higher rates,” Dean R. O’Hare, Chubb’s chairman and chief executive officer, said in a release. “We see the industry environment continuing to favor rate increases, and that bodes well for continued premium growth.”

Overall, the outlook for the p-c industry does seem brighter. A group of 11 Wall Street stock analysts and insurance industry professionals forecast an average 7% rise in net written premiums (gross written premiums minus reinsurance) in 2001, according to the report by the New York City-based III, an insurance- industry funded group.

Further, on average, the analysts estimate a 5.2% jump in net written premiums through 2000. That percentage represents a substantial upward revision of the 2.9% rise they predicted in 1999 for this year, according to III.

Bear Stearns predicted the highest hike in net written premiums, 11.8%, with J.P Morgan predicting a 10% rise and Lehman Brothers forecasting a 7.5% rise in premiums next year.