10 signs of chaos

Risk & Insurance, May, 2003 by Charles H. Cox

The insurance market woes continue. The fallout from the January 2003 renewals is behind us. We cautiously await the July 2003 renewals. Let's take a step back and look at some of the signs that show that chaos still reigns in the insurance industry.

1. Renewal Costs--The most dramatic sign of chaos is the continuing escalation of insurance costs. It is still common to see 20-percent to 30-percent across-the-board increases on top of the 30-percent to 40-percent increases that were imposed in 2002. Most notable have been the increases in excess umbrella liability costs. Increases over last year continue in the range of 50 percent to 100 percent for many segments. In many cases premiums have doubled, and limits have been cut in half.

2. Coverage Restrictions--Coverage is being curtailed, drastically in some cases. In one case, an insurance company was apparently in such a rush to cut coverage it actually eliminated more than it intended, resulting in the need to reinstate the coverage deleted by mistake.

3. Financial Crisis Among Insurers--More and more insurers are on a "death watch" as financial ratings plummet. Once-prominent insurers are fighting to stay solvent. Others are beyond hope. Policyholders are left to scramble to find replacement coverage and everyone has fewer insurers from which to choose.

4. Baseless Claim Denials-Citing policy language or exclusions that have no bearing on coverage for a claim and basing denials or reservations of rights on such language makes it clear that insurers are hoping to discourage policyholders from pursuing any recovery. Some of the denials and reservations seen in recent months defy all logic, but they keep at it.

5. Ineffective Middlemen-Just what is the broker's role these days? While not all brokers are guilty, an alarming number of them quickly acquiesce to unreasonable positions taken by insurers. Coverage reductions and premium increases are too often accepted without question, or are explained away by the "continuing insurance crisis." With commission income increasing commensurate with policy premiums, many brokers balk at a fee-based income if it is less than the commission income they would otherwise have received.

6. A Return to Underwriting-This new industry mantra is already growing old. While a worthy goal, the fact is that the once-respected art of underwriting is all but gone. Today, if a risk happens to fit into a category, exclusions for the class of business will often be required, regardless of the exposure of the individual risk being "underwritten."

7. Loss Control Again-A 2001 loss control inspection for a specific location yielded 10 recommendations. One year later, a loss control inspection of the same location yielded about 30 recommendations. Did the risk really deteriorate that much or is the insurer looking to justify a rate increase or non renewal?

8. Terrorism Risk Insurance Act--However well-intentioned as a backstop to enable policyholders to buy terrorism coverage, it should come as no surprise that policyholders are being charged, in some cases, premiums for backdated coverage. This despite the fact that no benefit can ever be obtained from that backdated coverage. Are regulators asking why?

9. Workers' Comp Still Broken -- Eight states received a failing grade in a recent study conducted by the Work Loss Data Institute of how long the average work outage lasts when employees suffer injuries covered by workers' comp benefits. In California, the State Insurance Fund that writes 54 percent of the workers' comp policies is on the brink of financial collapse.

10. Mold Dilemma Continues -- Although initially not thought to be the next asbestos crisis, more policyholders are being left to deal with mold exclusions and loss exposures that are beyond their means to retain.

Clearly, the insurance market is in chaos. Worse, however, is the fact that the insurance industry is on the verge of obsolescence.

Once intended to provide protection against fortuitous risks of loss, a growing number of businesses are in search of alternatives since the insurance industry has shown it is unable to fill that need.

Charles Cox, president of Aldrich & Cox in Orchard Park, N.Y, can be reached at cox@aldrichandcox.com.