Prices Increase, Capacity Shrinks and Business Flows to Alternative Markets
7/18/2002 Washington, DC — The Council of Insurance Agents
+ Brokers released its second quarter Commercial Insurance Market Index, documenting the
deep and deepening distress of the commercial insurance market. In the data for the period
April – June 2002, which includes July 1 renewals – The Council’s members reported rates
up, capacity down, and growing use of alternative risk management mechanisms.
“Absent definitive action on the federal terrorism
backstop, there is no relief in sight on either the supply or demand side of the
market,” said Ken A. Crerar, The Council’s president. “Our members report
commercial insurance rates show no signs of peaking. Closing the third business quarter
since September 11 terrorist attacks – and seismic aftershocks of record-shattering
natural catastrophes and corporate scandals – consumers, carriers and brokers alike are
clearly on the cutting edge of pain now spreading to all segments of the US economy.”
Among major findings:
Terrorism coverage is scarce, and particularly hard for
property, general liability and umbrella coverages. More than 80 percent of broker
respondents say the number of policies renewed with terrorism exclusions grew between the
first and second quarters this year. “Virtually everyone excludes terrorism,”
said a broker from the Northeast. Small, medium and large commercial accounts throughout
the United States continue to experience rate increases from 10 percent to 50 percent,
with the largest increases (20 percent to 50 percent) hitting medium and large accounts.
“All accounts are being re-underwritten. (But,) terms and conditions are being
restricted. Property capacity has been reduced,” a broker from the Pacific Northwest
commented. Carriers continue to tighten terms and conditions with much tighter
underwriting. Broker respondents report much higher deductibles, more coverage exclusions
and “fewer things to negotiate.” The trend is apparent across the market, with
96 percent of broker respondents reporting mold exclusions added to property and
construction renewals, and 71 percent saying pollution exclusions are added at renewal.
Though nearly all individual lines surveyed saw noteworthy
increases in the 20 percent to 50 percent range, umbrella and medical malpractice
insurance have spiked, with most brokers reporting increases of 30 percent to 100 percent
or more. Moreover, coverage problems are not limited to any one region of the country.
“Umbrella pricing is up 100 percent and most carriers
have only half the capacity they had last year.” (Northeast region) “Umbrella
markets have doubled and tripled renewal prices – pointing to reinsurance terms as the
driver.” (Southeast region) “Umbrella [market] has gone wild!” (Southwest region)
One broker described “a near crisis” in the
medical malpractice area on a primary and excess basis. “Those carriers who are
willing to write excess want to attach at $5 million or higher.” Brokers also report
physicians forced to join assigned risk pools or go without coverage. “The JUAs (Joint Underwriting
Associations) have become the market of only resort!” a broker from the Northeast said.
Distresses are spread among all commercial lines. The
D&O market is buffeted by the Enron and WorldCom accounting scandals. Property blanket
limits are not available on most large real estate schedules. Though property capacity is
a generalized problem across the market, it is particularly restricted in coastal areas
subject to catastrophic risks, which, brokers report, are subject to tight and tightening
underwriting scrutiny.
A significant number of brokers surveyed reported some
carriers have suspended writing new business entirely, while others are rejecting accounts
that are not “squeaky clean.” “Any account that is not renewed is finding
it tough to get anyone interested in quoting,” one Midwest broker stated.
Unquestionably, the tight primary market has forced more
business to turn to the alternative market, where there are fewer regulatory restrictions
on exclusions and policy terms and conditions. Overwhelmingly, 97 percent of surveyed
brokers reported they used the excess and surplus lines market most often as an
alternative for traditional coverages, and 20 percent reported use of captives.
And how are consumers fairing amid a market in such
distress? Brokers reported customers responding to price and capacity issues most often by
lowering limits, dropping some coverages, raising deductibles and looking at alternative
risk management mechanisms.
Brokers said “terrorism legislation” and
“investment conditions” are the two major factors that most affect stability in
the longer-term insurance market. Most brokers said they prefer to “wait and
see” rather than predict what lies ahead.
“The market is rough,” said Ken Crerar. “Not
surprisingly, our members see increasing consumer frustration. Many industry consumers had
hoped the market would settle down by the July 1 renewal period. But our survey proves
categorically that did not happen. And, I don’t know anyone in the brokerage or carrier
leadership who doesn’t understand the pain consumers feel and the very real challenges they face.”
Crerar continued, “Our industry has honored its
commitments from September 11. As the industry has fought mightily to regroup, it has been
buffeted by corporate accountability scandals and natural catastrophes. There’s no
question that House and Senate passage of the federal terrorism backstop legislation – now
working its way to conference – provides some hope. The Council joins other insurance
advocates in urging federal policymakers to have a bill signed into law by the president
in time to help buyers in the final two quarters of the year. It’s good we have made it
this far this fast. Then again, with economic fallout so clear and widespread, it’s
frustrating it is taking Congress so long to act.”
To view the complete document, which includes national and regional data charts, check
www.ciab.com/resources/docs/ciabmarketindex_2q2002.doc.
Since 1913, The Council of Insurance Agents & Brokers
has provided industry leadership while representing the largest, most productive and most
profitable commercial insurance agencies and brokerage firms in the U.S., and around the
globe. Council members in over 3,000 locations, place nearly 80% – well over $90 billion –
of the U.S. commercial property/casualty premiums. In addition, Council members specialize
in a wide range of insurance products and risk management services for business, industry,
government and the public. Council members, who operate nationally and internationally,
also administer billions of dollars in employee benefits. Web site:
www.ciab.com.
