prepare for insurance market changes: backgrounder, Fact sheet & what you can do

November 14, 2011

introduction

A.M. Best recently reported that 90% of chief financial officers of insurance companies with more than $1 billion in written premium say the property insurance market is hardening or beginning to harden, according to a Towers Watson survey. Richard Kerr, CEO of MarketScout, which publishes an insurance industry market barometer, said recently that the “soft market is drawing to a close” for property/casualty insurance in the United States.

At RJF, we have seen some of the results of this hardening market over the past months. These include less available coverage, less favorable terms for policy holders such as higher deductibles and lower limits, tighter underwriting scrutiny, and increased insurance premium rates.

HARD MARKET HISTORY

The insurance market has historically operated cyclically, with periods of market hardening followed by periods of softening.

OVERVIEW OF RECENT HARD MARKETS

1983-1988

• Insurer capacity was non existent leaving many employers without insurance.
• Many “State Funds” were created as a result of this hard market. 

1991-1992

• More of a pricing correction to bring more capacity back into the insurance marketplace.
• The market saw an adjustment of 10% to 12% increases.

2000-2002

• Heavily affected by the international economy, poor loss results, and the physical/psychological impact of 9/11.
• The market adjusted itself through increases of 15% to 20%.

2011-?

• Thus far, only those businesses with poor loss experience have been affected. 
• Tighter underwriting standards (insurers are accepting less risk).
• Adding medical cost inflation back into the pricing equation.
• Passing through the 15% or more increase in reinsurance costs anticipated for Jan. 1, 2012.

INFLUENCERS: FACTS & FACTORS

MEDICAL COST INFLATION

Since 2003, medical cost inflation has averaged 6% annually, or a compounded 59%, through 2010. During the same time, employers benefited from a very competitive insurance marketplace, leading insurers to absorb the 59% inflation cost. The medical cost inflation would have affected not only workers’ compensation insurance, but also automobile insurance and general liability insurance. 

WORKERS’ COMPENSATION LOSS RATIOS

As of October 2011, the estimated year-end industry-wide combined loss ratio for workers’ compensation insurance is 121.8%. This means that for every dollar employers paid in workers’ compensation premium, $1.22 is paid out in claims and expenses. 

• Claims: The pure cost of the insurable loss (medical, lost time, disability).
• Expenses: Insurer overhead costs, legal, taxes, surcharges, reinsurance, independent medical exams, Preferred Provider Network services, etc.

CATASTROPHES

There have been substantial catastrophic events this year affecting the insurance market including:

• Significant flooding in New Zealand and Midwestern United States.
• Hurricane/flooding along much of the East Coast of the United States.
• Earthquakes in Japan and Turkey.
• Tornadoes, wind and hail losses in the Southeast and Midwestern United States

ECONOMIC INFLUENCE

Macro-level events and situations are also having an impact on the cost of insurance. These include:

• Under employment across the United States and worldwide, leading to excessive uninsured individuals who must be funded by both the private and public sectors.
• Financial upheaval in Europe.
• Inflation averaging 2.1%, but negatively affecting the cost of food and medical expenses.
• Investment returns averaging 0 to 3%.
• Excessive cash in claims reserves and surplus are dwindling for all insurers.
• Legislative actions and inactions affecting ratings and confidence levels.

HOW TO PREPARE for the hard insurance market

Employers not proactively addressing their business risks through sound risk prevention practices will feel more deeply the market change and financial impact. There are things you can do to help avoid or limit increased risk and insurance costs.

• Communicate early and often with your agent or broker.
• Understand the issues and build a strategic and tactical plan to manage the cost of risk process
• Create a plan that manages both risk prevention and losses after they occur.
• Bring your insurance carrier(s) closer to you to create trust and predictability.
• Understand the services available to you through broker and surround yourself and your business with them. Make sure your insurance carrier(s) know you are proactively managing your business risks.
• Fully understand how insurance is priced and how your individual experience affects pricing for you and others.
• Continually seek innovative ideas to manage your risks by employing those who know about them.

Remember that insurance is not just a commodity, but is, instead, one of many key tools you can use to manage your cost of risk. Its cost is directly related to your understanding and prevention of risk and loss.  

Questions?

The RJF Commercial Insurance team is available to help your company evaluate options for preparing for market changes. Contact RJF at 763-746-8000 or call your Insurance and Risk Prevention representative.