Risk Management

Liability Insurance Spikes of 10 Percent Seen

In California, some employers will be hit with price hikes of as much as 20 percent for workers’ compensation coverage, a new property-casualty ins...
David KatzApril 11, 2013

Despite a devastating six months of storm-related property damage, CFOs and risk managers will see much stiffer rate hikes for casualty insurance than for property coverage over the next six months, according to a report released yesterday by Willis Group Holdings, the big commercial insurance brokerage.

Although liability premiums will lead the pack, insurance prices will rise across the board in the second and third quarters. Yet finance execs and their proxies may be able to recoup some of the cash doled out to insurance carriers if they drive a hard bargain in negotiating their claims after a loss, according to the author of the report.   

The biggest hikes are likely to hit companies when they renew their workers’ compensation policies. At the top end of the market, in California, state-generated benefit increases coupled with a perception by insurers that rates are too low will push up workers’ comp premiums by as much as 20 percent, according to Willis Group. Driven by increasing claims frequency, workers’ comp carriers will charge employers across the country from 2.5 percent to 10 percent more than they did over the previous six months.

The broker’s outlook for other casualty insurance lines is equally grim. Prices for commercial general liability coverage (which helps companies pay for litigation stemming from bodily injury or property damage to third parties) will climb from 2 percent to 10 percent.

Auto liability and directors’ and officers’ liability insurance will also rise as much 10 percent, according to the report, which is based on Willis’ surveys of its brokers and analysis of the company’s own data.

In contrast, the cost for non-catastrophe property insurance will range from a fall of 5 percent to no change. Premiums for catastrophe-related property coverage should be flat to a 5 percent hike.

A takeaway for CFOs in a time of rising insurance costs is that they should pay close attention to getting more bang for the buck when a loss does occur, says Eric Joost, chief executive of Willis North America Specialties and an author of the report.

That means getting closely involved in the negotiation of a claim. For example, notes Joost, a CFO might estimate that a hurricane resulted in a $500 million loss to his or her company, while the insurer might be thinking that the loss is closer to $250 million.

Joost explains that in such a situation, a savvy finance chief might propose to the insurer that it start paying out the claim on the basis of the loss figure they both agreed on–$250 million–and negotiate the remaining amount later. In that way, the insured company can get its hand on some immediate cash to start paying for repairs to its damaged property. 

Bulging Balance Sheets
Why, considering Superstorm Sandy and other recent natural disasters, is property insurance relatively cheap? The balance sheets of the property-casualty insurance industry are more than adequately fortified to absorb losses stemming from isolated events like hurricanes, Joost says.

Further, property losses have, in the parlance of the industry, a short “tail”— meaning that claims for property damage expenses and related business-interruption claims tend to be made and paid immediately after the event has happened.

Thus, property insurance doesn’t burden property and casualty insurers’ balance sheets for very long. That’s not true in the case of casualty insurance, which consists of notoriously “long-tailed” lines of coverage. Insurers must hold reserves for long into the future, for it may take years for the lawsuits that trigger liability coverage to be filed.

Thus, the current rate hikes in liability lines are part of a slow market hardening that has been in the works for a number of years, according to Joost.  The low interest-rate environment, which is diminishing returns on the investment of the industry’s casualty reserves, is also prompting insurers to push for moderate rate increases, according to the report.

Although Willis has “not definitively identified a driver” for the increased number of workers’ comp claims, “candidates include the impact of economic conditions on employment opportunities, hiring of new or less experienced workers, the aging work force and consideration of how changes introduced by the Affordable Care Act will impact workers’ comp,” the report says.

In a time of high unemployment, insurance industry experts have long theorized, laid-off workers will try to make up for lost income by filing worker’s comp claims. New, inexperienced, and aging workers may be more prone to injuries leading to insurance claims, some say.

Asked how the Affordable Care Act would increase the frequency of workers’ comp claims, Joost said that employers and the insurance industry generally think the act will drive up such costs.

But Joost also downplayed the possible effects of the law on insurance claims, saying that the industry operates on past experience, not future predictions. And the many previous years of rising health care costs have had an effect on workers’ comp costs, he added.