Attacks just part of reason insurance rates are rising

CNY Business Journal (1996+), Dec 21, 2001 by McChesney, Charles

Hundreds of miles from the World Trade Center, the Pentagon, or the Pennsylvania field where United Flight 93 ended, Central New York businesses are paying higher insurance costs, in part because of the Sept. 11 attacks.

However, the attacks are not the only cause for the rate hikes. Indeed, say agents and insuranceindustry experts, rates were already climbing steeply before the attacks.

Mark LaLonde, principal at Bailey, Haskell and LaLonde, Inc., and former president of the Professional Insurance Agents of New York, says, "On our commercial side, we've been dealing with this through the year."

He says the attack was "the last straw; it pushed things over the edge."

Ellen D. Kiehl, executive assistant director of government and industry affairs for the Professional Insurance Agents of New York, New Jersey, Connecticut, and New Hampshire, explains that, "throughout the 1990s, insurers could provide insurance at a discount from their actual cost of paying claims because they could recoup the difference by investing the premiums profitably." But with the stock and bond markets weakening in the last 18 months, insurance companies can no longer expect investments to cover expenses not paid for by premiums.

James Stoddard Jr., at Haylor, Freyer & Coon, Inc., an insurance agency in Liverpool, points out that even with increases ranging 20 to 30 percent for some of his clients, rates are "still below" where they were seven or eight years ago.

"Because of the cyclical nature of our business," Stoddard says, some companies that were underpaying before will now find it hard to line up someone to sell them insurance. For the last three to five years, contractors, truckers, and some others had policies that were "terribly underpriced" because insurance companies just wanted to bring in and invest the premiums.

Now, he says, it is "more a problem of just being able to place the business."

Robert I. Miller, president of the Miller Agency of New York, Inc., notes that even though he can point out to clients that their new rates are still below where they were a few years back, news of the rate hikes "is still not very well received."

"They get spoiled by 15 years of insurance prices going down," he says.

Kiehl warns that rate-increase percentages will appear dramatic. "Many businesses saw their insurance premiums decline significantly over the period of the mid- and late 1990s. The math dictates that, to return to previous rate levels, a bigger percentage change is necessary.

For example, a policyholder may have enjoyed a one-third reduction in premiums, eventually paying a lower price that may have persisted for several years. Just to return to the original pricing level, the insured would pay 50 percent more."

LaLonde says he has been talking with clients and telling them that increases "could be at least 15 percent." For some, the increases will be greater.

Stoddard, a 14-year veteran of the industry, says the industry has entered a "hard market" and that "hard-market underwriting" means that insurance companies will increase rates, knowing they will lose some customers. Those losses are acceptable, because premium dollars are no longer certain to grow when invested in stock or bond markets.

Robert Connor, managing director for the Syracuse office of Marsh, the insurance multinational, says that at its height, the soft market allowed insurance companies to pay out $1.10 in claims for every $1 in premium, because insurance companies could make so much investing the premium. "You could actually buy insurance for less than your average loss," Connor says.

Looking forward, Connor says clients "may want to assume more of the risk," and "put more emphasis on loss control."

Miller notes that the last time insurance had such a hard market was in the mid-1980s. That hard market, he recounts, came on suddenly and "lasted barely 18 months."

With insurers getting back to paying out less than they make on premiums, now is a good time to enter the market, Connor says. Indeed, his company has created Axis, a Bermuda-based insurance company "to provide capacity."

Other factors are pushing up insurance cost for some "classes." Even at higher rates, contractors are finding it more difficult to find insurers because of the so called "scaffolding law" that makes employers liable when workers get hurt while working above the ground. The law, according to LaLonde, leaves businesses unable to defend themselves.

Make no mistake, the cost of insurance claims resulting from the Sept. 11 attacks is also pushing rates higher. The attacks, "taken together, were the costliest ever for the insurance industry," says Kiehl. Estimates for total insurance claims from Sept. 11 range from $20 billion to $70 billion. In comparison, 1992's Hurricane Andrew resulted in $18 billion in insurance claims.

Big as the claims are expected to be, Kiehl and others say the industry "was financially prepared" for the cost - even if it had not foreseen the magnitude of the attack.

However, says Kiehl, the "losses, plus the immediate, steep investment-market declines, caused a sudden, severe erosion of the capital that insurers and reinsurers had in reserve. This reduction means companies must be extra conservative going forward."