Risk Management

General Liability: Major Pain

After losing a whole lot of money last year, sellers of general liability insurance are now jacking up premiums. This trend won't change anytime soon.
Marie LeoneJanuary 22, 2002

Ask recent renewers of general liability coverage to characterize the market, and you’ll get three very different answers. A few will insist that policy costs are not actually increasing a great deal. Most others will say premiums are getting quite pricey. Still others will speak about mind-bending, triple-digit increases in the costs of general liability policies.

All three are right. In the wake of 9/11, general liability insurers are charging more for their products. Just how much more often depends on how much time a company spent in court last year.

According to insurance brokers, corporations that steered clear of employee or shareholder lawsuits the last few years are being asked to pay modest increases in their general liability premiums. How modest is modest? Brokers says rates for the best risks went up about 12 percent during the recent policy renewal season. Considering the hefty increases in property and workers’ comp insurance of late, 12 percent isn’t bad.

On the other hand, companies that spent an average amount of time in court — just an average amount, mind you — are being asked to pay around 50 percent more for their general liability coverage. Further, brokers say companies that found themselves on the wrong end of a slew of lawsuits are being socked with rate increases of 100 percent.

There is good news for risk managers, however. According to Pat Gallagher, CEO of insurance broker Arthur J. Gallagher & Co., the increase in general liability premiums is likely to slow over the next few years. Still, brokers say CFOs should not expect the seller’s market to go away anytime soon. Looking ahead, “insurance premiums will continue to increase every year for the next three years,” predicts Gallagher.

The prognosis is hardly surprising. Insurance providers are still reeling from the effects of September 11. Certainly, insurers aren’t going to commit capital if they can’t generate a return on their investments. And right now, insurance carriers are getting bupkis on their general liability investments. Gallagher claims insurers are paying out about $1.10 in claims for every dollar they collect in general liability premiums.

Still Lurking About

Economists and other financial gurus point out that, generally speaking, it’s hard to make a profit if you pay out more than you take in. Still, this seemingly dire situation for insurers doesn’t yet resemble the liability crisis of the late 1980s. Back then, many insureds simply could not purchase general liability coverage — at any price. Janis Berger, managing director at Marsh, says most companies will still be able to buy general liability coverage in 2002 — if they’re willing to pay for it.

In fact, there’s actually been an influx of new general liability capacity of late. Over the last six months Aon, Marsh, and several other insurance industry players have launched new Bermuda-based insurance and reinsurance facilities. All told, Gallagher estimates, the players have plowed about $14 billion into new insurance facilities. “In general, Marsh doesn’t expect capacity to shrink during the foreseeable future,” says Berger.

That’s assuming U.S. corporates aren’t hit with another round of catastrophic losses. Certainly, more terrorist attacks on U.S. soil would spell serious trouble for the insurance industry — and would lead to a dramatic shrinking of capacity. Industry watchers also point out that the current availability of general liability coverage varies greatly by industry. Companies in high-risk sectors — think airlines, pharmaceuticals, and corporations with big fleets of vehicles — are going to face general-liability capacity problems for the foreseeable future, say brokers.

Moreover, companies that are able to pick up the coverage at reasonable prices still need to stay alert to the hidden costs lurking in insurance contracts. The usual suspects: rising deductibles and narrowing policy terms and conditions, says Joe Lombardo, managing director of Aon Risk Services. According to Lombardo, liability premiums will continue to go through a sort of market correction over the next few years. During that time, he believes insurers will “ask companies to assume more risk before insurance kicks in and provide them with lower coverage limits.”

Indeed, what seems to be a relatively low increase for general liability coverage “may not be such a great deal,” claims Lombardo. He says CFOs should assess price increases based on coverage changes — such as the introduction of a new deductible or new exclusions — not on what other companies are paying. With insurers now demanding more details about loss histories and company operations, many companies will end up with tighter coverage terms.

Satisfying insurers’ requests for more details may actually prove to be a boon to buyers, however. Such an examination helps a CFO get refamiliarized with a company’s risk profile. That in turn, may lead some corporates to assume more risk in their general liability coverage — and therefore save on premiums. Says Ray Schaetzle, the former CFO of the New Jersey Nets basketball team and now a project leader for CFO services outsource Resources Connection: “It’s time to tailor coverage goals to reduce premiums.”

Many companies will probably do just that. The recent wave of price increases “will cause many small and midsize companies to reassess risk, and in some cases, get rid of coverage,” predicts Schaetzle. The strategy has its perils, however. In lowering the fixed costs represented by insurance premiums, a company picks up the risk of expense spikes if it gets hit with a big lawsuit down the road. “After a rigorous assessment,” says Schaetzle, “you’ve hopefully guessed the right way on, say, buying less expensive coverage with higher deductibles.”