Partly cloudy forecast
Hurricane Sandy not expected to change outlook for rates in 2013
- November 29, 2012
Hurricane Sandy’s devastating march up the Northeast coast just before Halloween came as a surprise to the commercial insurance industry, which had seen fewer catastrophic events in 2012 than last year. Early estimates could put insured losses from Sandy as high as $14 billion.
“I’m not sure that estimate is enough,” says Walker Sydnor, president of Scott Insurance in Lynchburg. “It was a catastrophe in some populated areas. It is something for insurers to think about.”
How will Sandy affect commercial insurance rates next year?” “I don’t see this as something in itself that will shake up the entire market,” Sydnor says, noting that Hurricane Katrina had $40 billion in insured losses. “It will probably reaffirm the direction the market was taking.”
The weather forecast for commercial insurance rates next year is far less threatening than Sandy’s October winds. Depending on your degree of optimism (and risk exposure), it could be either partly cloudy or partly sunny.
H.B. Whitmore, president and managing partner of Willis of Virginia Inc., predicts that businesses will see both rising and falling property/casualty rates in 2013. Modest rate increases in casualty, executive risks and several specialty lines will be offset by declining rates for noncatastrophe-exposed property programs, according to the 2013 Marketplace Realities report from global insurance broker Willis Group Holdings.
“Noncatastrophe areas are fairly competitive,” says Whitmore, noting that these areas are not in high-risk zones such as coastal areas that are exposed to natural disasters. “Rates in those areas will be flat or there may be a little decrease, absent adverse loss experience.”
Insurance brokers say the commercial market continues to defy the standard “hard” (high rate) and “soft” (low rate) market cycle. “This isn’t the soft market like in the past couple of years, and it’s not the classic hard market where you can’t negotiate rates or find insurance,” says Michael Holland, property and casualty practice leader for Wells Fargo Insurance in Richmond. “What we are seeing is a tightening of the market.”
This year saw fewer natural catastrophes than in recent years, even with the late appearance of Hurricane Sandy. Last year, insurance companies had record-setting losses from events that included earthquakes in Japan, New Zealand and Virginia; flooding in Australia; tornadoes throughout the U.S.; and Hurricane Irene, which left a path of destruction along the East Coast.
Despite fewer catastrophes this year, the changing climate has led some industry experts to believe that “North America will be prone to extreme weather like the derecho [a, straight-line windstorm associated with a fast-moving band of severe thunderstorms] we had in Virginia this year,” says Sydnor.
Before Sandy, the U.S. had experienced $20 billion to $25 billion in losses from tornadoes, wildfires and the derecho that devastated parts of the East Coast in late June. This year’s losses, combined with those from Hurricane Irene last year, have affected rates offered by some larger national insurance carriers in states that experienced extensive damage. “They have raised their property rates,” says Roy Bucher, president of Chas. Lunsford Sons & Associates Inc. in Roanoke.
Bucher expects next year’s commercial insurance rates nationwide to be comparable to this year’s where businesses saw small increases in their renewal rates. “I don’t see anything that will change the marketplace in 2013,” he says. “Carriers will try to get anywhere from a 2.5 percent to 7 percent rate increase on their renewals.” Virginia may fare better than other states when it comes to rates, he adds. “In Virginia and North Carolina it’s still a soft market. It’s a buyer’s market.”
The insurance industry hasn’t experienced a hard market in almost 10 years. “We had a real hard market in the early 1980s when premiums tripled,” Bucher says. “We haven’t seen anything like that since.”
Not every commercial insurance customer will see an increase in premiums next year. Insurance carriers are “trying to get increases for businesses that have had loss experience as well as businesses that are in more loss-prone industry groups such as contractors,” says Walter Smith, regional agency manager for BB&T Insurance Services in Richmond.
Companies seeking new insurance coverage will fare better when it comes to rates than companies that are renewing their policies. “Insurance carriers seem to be more competitive on trying to write new business than if it’s a renewal,” says Bucher. “They will cut premiums to get new business but on renewals they are trying to get increases.”
Rate increases for renewals began to inch upward in the second quarter of 2011. “In the first quarter of 2012 most rate increases were just under 5 percent,” Sydnor says. “The two areas that had the highest renewal increases were commercial property with a 7.4 percent increase in January 2012 and workers’ compensation with a 6.5 percent increase.”
Workers’ compensation rates have been down for the past six to eight years, according to Smith, but medical costs have continued to climb. “Carriers are not generally able to raise rates to keep pace with medical increases as fast because of the regulatory environment,” he says. “Settling claims for prior losses gets expensive. It cuts into the bottom line of insurance carriers.”
Workers’ compensation claims are mainly either related to lost time or medical bills. Today, more than 50 percent of all claims are medical. “That is the problem,” Sydnor says. “We as a country don’t have a solution. What’s driving the claims cost is medical inflation.”
Additional lines that may see rate increases next year include directors and officers liability insurance as well as employment practices liability coverage. “The firming of rates is driven by years of declining pricing coupled with general economic conditions,” says Holland. “These lines of coverage, in addition to crime insurance, typically experience increased claims activity as companies struggle financially and downsize their work force.”
Virginia is typically a “little more competitive than average” when it comes to commercial insurance rates, Whitmore says. “One interesting thing going on in Virginia now is that the state is considering the Virginia Worker Misclassification Act.” The bill “prohibits an employer from classifying an individual as an independent contractor if he is an employee.” This would put more employees on the books, which could raise workers’ comp premiums.
Several states are looking at this type of legislation, Whitmore says. “It could redefine who is an employee,” he says. “Companies have been using contract workers who look like employees. It looks like Virginia is cracking down on that.”
As far as trends and new products on the commercial insurance front, cyber insurance continues to remain competitive. That is the term for policies covering risks such as hacked computers, virus attacks and other technology-related areas. “More companies are looking at it and purchasing it,” Whitmore says. “The coverage you can obtain continues to be broadened. If you haven’t looked at it in a year, your coverage is probably out of date.”
Willis Group Holdings launched a new insurance product of its own called WillPLACE. The online tool helps Willis match its clients’ insurance needs with the most appropriate insurers. “It captures underwriting data and market responses and gives us the ability to slice it and dice it for the business you are in,” says Whitmore. “It can help with premium costs.”
While businesses are hoping for an improved economy next year, that reality could lead to higher premiums for some businesses. “If you have inventory increases, for example, it could lead to increased property premiums,” says Bucher. “If your payroll increases, workers’ comp premiums increase. A sales increase in your company would increase commercial general liability premiums.”
There are ways that businesses can help reduce their insurance premiums. “The way to get the best terms and conditions out of a carrier is to give the underwriter a comfort level from a risk standpoint,” Holland says. “Make sure that the policies and procedures you have in risk management are firm and buttoned up and get people back to work as soon as possible.”
Businesses should know what exposures they have. “When you can demonstrate that they are better than average, you can save on insurance premiums,” Whitmore says.