For the last several years, it has been a buyers’ insurance market. Despite underwriting losses and weakening investment returns, capital flowed into the insurance market place, increasing insuring capacity and maintaining artificially low insurance rates. Over the past six months, we’ve seen a flattening to modest hardening of the insurance market place.
While it will be some months yet before 2011 results are fully understood, it is clear that 2011 was a unique year. Catastrophe losses in the US are likely to total more than $35 billion, once all of the results are in. More importantly, these are not just damages caused by a single hurricane. In 2011, we had earthquakes, hurricanes and tornadoes causing massive damage in the US. 2011 set a record for the greatest number of events generating billion dollar plus losses in the history of the insurance industry.
Historically insurance underwriters counted on investment returns to shore up weak underwriting results. For most well-managed insurance carriers, their investments were largely in government and corporate bonds, rather than in stocks. Investors fleeing the volatility in the stock market, increased demand for bonds, effectively lowering their yield. Since 2008, the returns available from insurance carrier investments have become nominal at best.
What can you expect in the 2012 insurance market?
If you have high severity exposures and/or adverse loss experience in workers compensation, your premiums are going to increase. You should expect to be hit be increases in your workers compensation experience modification and corresponding decreases in schedule credit discounts, if your state allows them. If you have had very adverse loss experience, you may find yourself in your state’s workers compensation pool, historically the market of last resort.
If you have had property losses, premiums are likely going to increase and alternative options will decrease. This is particularly true for historically difficult exposures, such as garden apartment complexes. We have always pointed to the property exposure associated with hospitals as being equivalent to insuring pig iron under water. High quality fire restive construction, fully sprinklered, sophisticated alarm systems, people on site 24/7 … what could go wrong? The tornado last year in Joplin, Missouri damaged the hospital beyond repair, and is generating a substantial business income loss as well. If you have difficult exposures, your ability to get insurance just became more difficult. Was 2011 an aberration or does it reflect changes in global climate? Will it repeat itself, or will losses return to normal? Only time will tell.
Executive risk exposures are not immune from the hardening market place either. In our base of business, we are seeing average increases from five to 10 percent in this line of coverage.
- Directors’ and officers’ liability claims are up in a soft economy, marked by the failure of many businesses, large and small. The claims filed by distressed shareholders, regulators and unsecured creditor committees.
- Employment practices liability claims have increased substantially, particularly as unemployment benefits run out, and people become desperate for any income stream they can find just to stay afloat. EEOC filings reached a new record high, totally close to 100,000 new filings in 2011.
- Professional liability and specialty coverages have followed the D&O liability coverage, and become more expensive and more difficult to place. In a hardening market place, we tend to see London become more of a player, and we expect that will happen in 2012.
- Anecdotally, I have seen a greater number of employee dishonesty claims in the past three years than in my entire career. Economic pressure plus a change in how many employees view their employers have led to people taking advantage, “because they can.” I find that many businesses underestimate their exposure to employee dishonesty losses, yet the insurance against those losses remains relatively inexpensive.
What about general liability and commercial automobile coverage?
Thus far, the stress in the workers’ compensation, commercial property and executive liability insurance markets has not manifested itself in the general liability and automobile lines of coverage. We expect to see firming in both lines of coverage in 2012, but it is too early to predict by how much.
Final Thoughts
Now, more than ever, you need an experienced insurance professional, backed by a strong organization, to help you navigate the insurance market place. Now is not the time to blanket the market place in search of quotes. Work in a disciplined, organized fashion with an insurance profession that you trust to safely guide your company’s insurance program.
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