Business insurance will cost you more - includes related articles - Special Report

Nation's Business, June, 1993 by John S. DeMott

Last year's catastrophes hit property and casualty insurers hard, and they'll try to recoup through higher premiums for small firms.

Pounded last year by the worst claims losses in American history, the U.S. property and casualty insurance industry probably will raise the premiums for commercial insurance on your small business before the end of this year.

But insurance experts expect the largest increases to be no more than a few percentage points for businesses whose annual insurance premiums are $20,000 or less.

For larger accounts, where there's more insurer competition for business, and where annual premiums run to hundreds of thousands of dollars, hikes will be smaller if they occur at all.

Premiums for commercial auto insurance--the kind many small businesses must buy for their delivery vans and other vehicles with load capacities of a ton or more--should hold steady or even go down.

Rates for personal passenger-car coverage continue to be subjected to market tumult--particularly in California and New Jersey, where reform pressures are growing daily. (See the box on Page 48.)

But the price trend is clear for most types of property/casualty coverage. Says Terry Welsh, vice president of sales and business development for standard commercial accounts at Aetna Casualty and Surety Co., in Hartford, Conn.: "What you're going to see is property [insurance] pricing start to creep up."

What insurers call "capacity"--their ability to write coverage--has shrunk somewhat because of insurance-company pullbacks from some markets, but it is still abundant throughout the industry. This and the normal processes of state rate regulation work against hefty premium increases; literally too many insurers are chasing too few premium dollars.

Says Jim Fricker, a zone underwriting consultant for State Farm Fire and Casualty Co. in Bloomington, Ill., and a veteran of 27 years in insurance: "For every one carrier that increases its premium, there's another marketer out there who will go in and price [its] products very competitively."

Yet with premiums for other types of insurance, like workers' compensation and group health, turning into major insurance burdens for many employers, any increases in commercial property/casualty coverage, no matter how modest, won't be welcome. Nor will premium increases in coverage for homes and autos, which are also likely in some parts of the country.

If there's a villian anywhere, it can be found in last year's headlines. Florida, Louisiana, Hawaii, and the East Coast were ravaged by nature at its most furious. Add to those natural disasters the Los Angeles riots and the flooding of Chicago's Loop, both in April, and you get some idea of how badly the U.S. property/casualty insurance industry was stung.

Insurance carriers paid more than $23 billion in claims in 1992, the most ever in a single year, reports the Property Claims Services division of the American Insurance Services Group, in Des Plaines, Ill., which compiles loss figures from information supplied to insurers by adjusters.

The total, says Sean Mooney of the Insurance Information Institute, was 10 to 12 times more than the industry typically pays in a year and more than three times the prior record of $7.6 billion, set in 1989 after Hurricane Hugo hit the East Coast and an earthquake pummeled the San Francisco Bay area.

Hard figures still are being gathered, but Hurricane Andrew alone is shaping up as history's costliest disaster, at $15 billion to $16 billion in damage.

The bad fortune seemed headed for a run into 1993. In February, the terrorist explosion at New York City's World Trade Center caused at least $510 million in damage and business losses. Less than a month later, what was billed as the "storm of the century," with barometric pressures lower than those in the blizzard of 1888, engulfed nearly half the United States and semiparalyzed commerce in a dozen major cities for three days. Losses totaled $1.62 billion.

To Rich Kasyjanski, who runs membership services for the Independent Insurance Agents of America, in Alexandria, Va., which represents 28,000 agencies, the losses spell higher prices for insurance for small businesses. Says he: "What this means for customers is that when companies pay out these losses, the losses get calculated back into the rates, and the rates go up for everybody." As of now, he says, "prices aren't rising dramatically, but they are starting to increase."

While you can probably try negotiating, insurers have been training their salespeople for months in spirited defenses as to why they can't go much lower than their original quotes.

Says Aetna's Welsh: "It used to be when a customer said, 'Your price is too high,' our answer was, 'Well, how low does it have to go? What do we have to do to write the business?' Now we talk to them about why this premium is the right premium for this account."

The biggest selling point for Aetna and the other major carriers is service. Good service, they say, costs money to provide, and customers should take that into account before switching insurers just to save a few premium dollars.