Economic & Business Focus: Run for Coverage

Insurance rate hikes are slowing, but high premiums and stiff limits on terms and conditions are driving companies into alternative markets.

Commercial insurance buyers are still paying the price for the soft market of the 1990s. Premiums continue to rise, although at a more moderate pace than last year's astounding increases. Forecasts indicating that the hard market will last into 2004, and possibly beyond, are accelerating the shift to alternatives.

Underpricing during the soft market generated a dramatic shortage in loss reserves by the end of 2000. When investment returns fell and catastrophic losses hit insurers in 2001, premiums for most lines skyrocketed. Although insurers increased reserves by more than 8 percent last year and the number of catastrophic losses is down, reserves remain insufficient.

Corporate buyers report that the property and casualty market continues to be difficult, with rate increases of 30 percent to 50 percent commonplace. According to a survey of brokers by the Council of Insurance Agents & Brokers (CIAB), 8 percent of midsize commercial property and casualty accounts and 11 percent of large accounts experienced premium increases greater than 30 percent in the fourth quarter of 2002 (see Rising Property and Casualty Premiums, below). In the fourth quarter of 2001, half of all midsize and large accounts experienced premium increases over 30 percent.

"Certain lines of insurance, such as directors and officers liability and hospital professional liability, have been hit particularly hard," notes Jim Swanke, strategic risk financing practice leader and principal in the Minneapolis office of Tillinghast-Towers Perrin. "Rate increases of 300 percent or more are not uncommon in these two lines."

In addition to larger premiums, insurers are imposing higher deductibles and retentions and are cutting back on the limits they're willing to offer. "The scope of coverage is being cut, and multiyear deals are a thing of the past," Swanke says. "To complicate matters, the pool of acceptable insurers has been shrunk by the financial downgrade of some insurers." An industry shakeout began last year; more than 25 insurance companies were taken over by regulators, and many others are now poised on the brink of takeover.

In 2002 -- for the first time in six years -- businesses reduced the level of insurance they purchased, cutting liability limits by an average of 6 percent, according to a Marsh Inc. study of more than 3,600 companies. Organizations with annual revenues of $10 billion or more reduced limits by an average of 10.4 percent. Companies in industries facing the largest price hikes reduced their limits the most, with chemical and pharmaceutical businesses cutting limits by an average of 22 percent.