Climate change

Calmer weather leads to more competition, lower rates

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by Joan Tupponce

Steve Piascik plans to pamper his employees with $2,000 he saved on his liability insurance this year. “We changed insurance companies because of lower liability rates,” says Piascik, the founder and president of Piascik & Associates, a Richmond-based CPA firm. The change resulted in a 12 percent drop in insurance premiums, allowing the firm to raise its coverage limits and “put money back into the business by giving our staff additional benefits.”

The firm already offered its 20 employees an unusual annual perk — the choice of a fishing trip or a day at a spa. Because of the insurance savings, employees choosing the fishing trip this year will travel to a North Carolina beach for deep-sea fishing instead of casting their lines on Virginia’s Eastern Shore as they did last year. And workers spending a day at the spa will have a choice of five spa services (such as massages) instead of two.

“It was a win/win everywhere,” Piascik says. “My staff’s needs and the working environment are a priority here. That is where I would rather spend the couple of thousand dollars I saved.”

The falling insurance rates that Piascik and other company owners are experiencing are a result of a change in the weather. For the second year in a row, the United States had a mild hurricane season, calming fears that storm-stricken 2005 was the beginning of a long cycle of weather catastrophes. (In fact, the rain and wind of two years ago has given way to drought in much of the Southeast.)

As a result, commercial insurance rates generally decreased this year and are expected to stay on that course through 2008. “We’ve had limited catastrophes, and the insurance companies are doing fairly well financially,” says Chris Schutt, managing director and president of Virginia operations for Marsh USA. “Capacity [available limits to write insurance] is continuing to increase. There’s more capital coming into the market, more available insurance to be written and more supply.”

That wasn’t the case two years ago when hurricanes like Katrina pounded the country, raising insurance rates and limiting capacity. “Everything spiked up dramatically,” recalls Dudley Fulton, president and CEO of USI Insurance’s mid-Atlantic region in Norfolk. “The greatest impact was in coastal areas, but it had a ripple effect through the property sector.”

Mother Nature’s quiet stretch is a boon to the insurance industry. “The last two years have been some of the most profitable in modern history,” says Walker Sydnor, president of Scott Insurance Co. in Lynchburg. “Rates and attractive lines [types of coverage without severe exposures that are sought after by underwriters] are getting softer. They are very competitive.”

Competition in fact appears to be revving up. In analyzing market data from the Council of Insurance Agents & Brokers, Lehman Brothers found that the average drop in insurance premium rates was 11.3 percent in the first quarter of this year. That compares with a 2.7 percent decrease in the first quarter of 2006. In fact, commercial premiums in the second quarter of 2007 declined to their lowest level since the fourth quarter of 2001 after the 9/11 terrorist attacks.

Two factors — a natural disaster of some type or a significant shift in the investment market — could dampen the optimistic outlook for policyholders. “Insurance companies are financial institutions,” Schutt explains. “A lot of their results are driven by the investment market.”

Insurance companies generate in­­come from premiums and investments. In the first half of 2007, insurers were counting their profits. But if investment markets turn sour, insurance companies may “try to make up that loss by adjusting premiums,” Schutt says.

Not every commercial insurance customer is enjoying the benefits of a soft market. Businesses in coastal areas are not getting the same rate discounts as their inland counterparts. “There are more takers than there were a year ago, but coastal properties are still a problem,” Sydnor says. “Insurance companies have short memories, but they’re not that short.”

The one bit of good news for Virginia’s coastal companies is that insurance rates are remaining steady and in some cases moving downward. Experts believe there will be some softening in the coastal property market in 2008.

“In a soft market you are going to see better terms and conditions for companies in the coastal areas,” Schutt says. “You may see deductibles coming down and larger limits.”

But coastal areas in other parts of the country may not be as fortunate. Some insurance companies, for example, are pulling out of Florida. “They don’t want that exposure,” says Roy Bucher Jr., chairman, president and treasurer of Chas. Lunsford Sons & Associates in Roanoke.

Because the Virginia insurance market is competitive, many carriers are offering customers lower deductibles, additional coverage and increased limits in an attempt to retain business. Some are aggressively seeking new business. “You’re seeing more of the current underwriters fighting harder to keep their business,” Schutt says. “There’s a lot of competition and price cutting.”

Some insurance carriers, in fact, are returning a portion of the premium to customers that have had fewer losses than in previous years. “They will share in the good year and give it back to the client,” says Walter Smith, regional agency manager for BB&T Insurance Services, based in Richmond. “It’s a form of dividend. That’s something we haven’t seen for several years but we’re beginning to see it because of competition.”

The soft market fueling these competitive flames also applies to liability coverage. Companies are saving money and using those savings in a variety of ways. They can, like Piascik & Associates, put the money back into the company or they could use the savings to improve their limits or purchase additional lines of overage. “Some companies are buying higher limits, especially of umbrella coverage which sits over underlying coverages. Others are choosing lower deductibles,” Smith says.

Schutt recommends that his clients look at their coverage and improve it. In a soft market, they can broaden their limits on flood, windstorm and earthquake insurance at little or no additional cost. “It’s not just about a softening price market,” he explains. “It’s an opportunity to get back or improve your coverage and terms.”

Companies may want to consider adding various umbrella coverages such as employment practices liability insurance. That coverage manages risks associated with civil rights violations, such as employment discrimination. Employment-related lawsuits are on the upswing even though companies are seeing selective rate savings in employment practices liability, says Sydnor.

“It’s an area that attorneys are focusing on,” he says. “That is why I think there is more activity. It would indicate that rates would go up, but the truth is they are slowly going down because there is so much pressure [on carriers] to get more premiums.”

Directors and officers’ liability is another area with increasing potential for litigation. “The buying and selling of companies affects shareholders,” explains Sydnor. “Companies are looking at their coverage carefully so they can protect their assets. Transactions can get tricky.” But because of competition, many companies are seeing decreasing rates for coverage.

Barring a natural catastrophe, a major terrorist strike or a war, many industry observers believe this downward course of insurance rate could extend even into 2009. “It is a buyer’s market,” says Bucher.

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