FOR IMMEDIATE RELEASE
Commercial Insurance Market Index Indicates Need for Federal Terrorism Backstop Market Distress Spreading to Critical Sectors of the Economy
WASHINGTON, D.C. – The Council’s Commercial Insurance Market Index for the first quarter 2002, released today, confirms last week’s announcement by President Bush that Congress’ failure to enact a federal backstop for terrorist acts is spreading distress deep into the nation’s economy.
Six months after the terrorist attacks on the World Trade Center and the Pentagon on Sept. 11, premiums for all types of commercial insurance continue to increase, coverage limits are dropping, and troublesome trends are developing in such critical sectors as construction, manufacturing and transportation.
The Council’s Commercial Insurance Market Index,1 the most accurate measure of changes in price trends available, shows that insurers have responded to the Sept. 11 attacks by placing sharp restrictions on their risk exposures – not only to terrorism, but also to a variety of hazards, including asbestos, mold, windstorms, earthquakes and others. Industry leaders have testified before Congress that absent a federal backstop for future terrorist acts, the industry would be forced to institute sharply higher prices and tougher underwriting standards for risks faced throughout the nation’s commercial sector. The House passed legislation in November 2001, but thus far, the Senate has failed to act.
The survey data show the marketplace, which had been hardening more than two years before the attacks, is experiencing sharply higher premiums, higher deductions, lower limits and restricted capacity from coast to coast and across the major lines of commercial insurance.
The majority of premium increases for the first quarter 2002 were in the 10 percent to 30 percent range for all account sizes, but one-fourth of the medium-sized accounts and nearly one-third of the large accounts experienced price hikes of 30 percent to 50 percent, The Council’s survey shows. Such rate hikes came on top of similar premium increases for medium and large accounts during the Jan. 1, 2002, renewal period (reported in the Commercial Insurance Market Index released Jan. 16, 2002 – see footnote 1 for links to historic data).
But for some business types, premiums were two to three times higher – if coverage could be found at all. Agents and brokers surveyed also reported the price explosion and limited availability of umbrella policies, evident in the previous quarter, continues for all types of coverage.
“Currently, contracting is almost a non-existent market. High property values are being rejected; property with high exposure (plastic, rubber, etc.) is either getting declined or tripled in rate. (Insurance for) hazardous material operations or exposures to this type of product is almost non-existent. Umbrella markets have either dried up or doubled in price,” said a broker from the Midwest. “In other words, the market is in MAJOR turmoil.”
“(The market is) very tight on contractors – under fear of construction defect. Widespread effect on all contractor classes and suppliers of construction supplies (windows, doors). Product liability pricing increases on latter are double, and market available shrinking,” said a broker from the Pacific Northwest.
Other brokers reported serious problems securing coverage for hospitals and nursing homes (premiums “out of sight”), carpenters, masons, roofers and others involved in residential construction, and difficulty placing commercial auto, marine, aviation, trucking and cargo accounts.
“We’re seeing the trickle-down effect of rate increases,” said Ken A. Crerar, president of The Council. “Over the last three months, we have moved beyond initial difficulty with high-profile or high-exposure properties to an environment where the broader marketplace is affected. Though our surveys since January 2000 have shown that harder market trends began well before Sept. 11, they have really picked up steam since then. Leaders from throughout the industry have warned Congress that action is needed and needed now.”
Increasingly, restrictions are placed on lines that have nothing to do with terrorism, as insurers move to tougher underwriting and assessment of risks in an effort to rebuild capacity after Sept. 11 and recoup nearly a decade of underwriting losses.
The Council’s survey found chief among exclusions – including widespread use of the ISO terrorism exclusion – are those for mold, asbestos and other environmental hazards for residences, apartment buildings and low-income housing, as well as liability limits placed on acts of nature, such as hurricanes, earthquakes, windstorms and floods.
“We are seeing $25 million of coverage for non-biologic/radioactive agents being provided, (with) that limit applying to all losses in a region,” a broker from the Southeast reported.
“Any account with exposures in residential construction being either non-renewed or converted to surplus lines policy with mold/fungus exclusion,” one Northeast region broker said. “Windstorm deductibles are now a percent of total insurance value instead of percent of loss. Also, wind deductibles increased from one to three percent higher. Catastrophic (coverage is) out of capacity in most areas, leaving many coastal exposures without options.”
The Council’s previous quarter survey indicated that many customers were turning to the alternative markets for excess and surplus (E&S) lines when they could not get the coverage or the price they wanted from the traditional market. This survey showed the continuation of that trend, as well as more interest in “captives” – a form of self insurance – to handle insurance needs. Agents also reported that some customers are choosing to “go bare” – meaning to buy no coverage at all – if they cannot find the coverage they need at a price they are willing to pay.
“General liability and package surplus lines markets are flooded with submissions which have been longtime standard market placements,” said one broker.
“Use of E & S markets (is) up by 25 percent since Jan. 1. Many accounts coming from standard markets and programs (marinas, restaurants),” added another.
“More interest from clients (about) captive formation, even some finite risk contract questions,” responded a third.
The survey asked brokers to describe their customers’ reactions to the tighter markets, higher premiums and explosions in deductibles and exclusions. Predictably, the most common consumer response is frustration, although respondents said most of their customers are aware of changing market conditions and not surprised by current trends and developments.
“In general, (consumers) are very aware, and to a certain degree, scared,” said a broker from the Midwest.
Another broker said his customers were doing everything from accepting higher deductibles to self-insuring to deal with the changing market. “One client just got a 50 percent rate increase and decided to go bare and self-insure. They have deep pockets and little in the way of losses. They just decided to roll the dice,” he said.
In addition, brokers reported serious problems placing medical malpractice insurance.
Similarly large premium increases of 10 percent to 30 percent were reported for group medical accounts, with more companies actively countering by shifting costs to employees through higher co-pays for office visits and drugs, cutting out prescription coverage altogether and moving to higher deductibles.
“There is a major move to cost-shifting to employees through co-pays, deductibles and coinsurance,” said a broker from Southwest. “Off-anniversary benefit reductions, provider network changes and pricing increases by carriers are emerging. New business underwriting has become inflexible. There are only two or three markets competing for new business, whereas we had six to eight in the past.”
“Unquestionably, the overall news for consumers is not good,” Crerar noted. “In difficult markets, our members – the top agents and brokers available – have the opportunity to really show their value to their customers’ bottom lines. Since Sept. 11, our members have beaten the bushes to find adequate coverage and worked with customers to develop captives and other alternative mechanisms needed to cover the risks commercial enterprises face.”
P&C Market Survey Contact:
Zach West
Senior Content Specialist/Copy Chief, Leader’s Edge
