The coming insurance crisis

One of the more downplayed aspects of the current post-9/11 economy has been the effect on the nation's Property Casualty (non-life insurance) industry.

While there may not be much "light" on this, things are certainly heating up.

America's insurance industry is reeling from a combination of things that individually may not have been too bad, but taken in combination are causing some real trouble for the insurance buying public.

Four Critical Factors are almost Guaranteed to Drive Up Insurance Prices

Critical Factor #1: Insurance companies have been losing money for years and that must change. Insurance companies have never been all that profitable. Wait before you scoff in disbelief have you ever heard a hotshot Wall Street analyst say, "Quick! Go invest in insurance!" Probably not.

Here's a secret that surprises most people: insurance companies haven't made money on insurance for years. Here's why during the long stock market boom of the 1990's, insurance companies were selling their insurance at very low prices. So low, in fact, that on average they were paying out $1.12 in claims and expenses for every $1.00 they collected in premium.

Critical Factor #2: The economic boom is over and so are investment profits. During the 1990's the insurance companies did make money, but they made money by investing their cash flow in the booming economy and stock market. Their investment profits more than made up for their operating losses, and the low prices helped them capture enough market share to keep the machine running.

The economy boom started busting in 2000 and continued on into 2001. The companies could no longer make enough investment profit to make up for their operating losses, and you can guess what happened… they started raising prices. Most likely, rates would have crept up steadily over several years (with some dramatic increases in certain lines of business) until the companies' loss ratios were once again profitable. But, then

Critical Factor #3: Tragedy strikes America and the financial stability of the insurance industry. The unthinkable occurred. On September 11, 2001, terrorists destroyed the World Trade Center. The act was horrifying. The personal loss was devastating. It can never be measured in dollars.

However, the physical damage and insurance claims are measured in dollars. Estimates run a staggering $40 billion to $70 billion in losses, and the insurance industry has to pay for that. Standard & Poor's, the industry rating firm, said if the losses exceed $50 billion, "it would begin to worry about the insurance system." That's exactly where the industry is headed maybe even more.

These huge losses will apply dramatic upward pressure on prices. Not because the insurance industry needs your money to pay the WTC losses, it has "reserves" for that, but because the magnitude of the WTC losses have brought the future financial stability of the insurance industry into question. And the financial stability of the insurance industry is critical to the world economy.

Critical Factor #4: The law of supply and demand applies to insurance, too. The final upward pressure on price is simply a matter of supply and demand. We all know how this economic law works around the holidays. Example: Ten million kids are screaming for the newest fad, but somehow the manufacturer only managed to ship eight million units for the holiday season. So, you pay $200 for something that will be $29.95 when the demand fades.

The insurance industry is suffering a similar problem now. Its "capacity" (supply of insurance capital) is down, but the demand for insurance from businesses and individuals is just as high. The law of supply and demand tells us prices must increase.

THREE Direct Impacts On YOU, Your Family And Pizzeria

The unprepared will lose money, lose protection and waste time!

Impact # 1: The cost of pizzeria insurance is going up period. The events explained above make this an unavoidable outcome. It's not a matter of if, it's a matter of when, how much and what you can do about it to cushion the blow.

Personal lines insurance (personal auto, home, etc.) will probably feel some effect. While the trickle down effect from the WTC losses may have little impact on personal lines, the companies must adjust their pricing so they are operating at a profit once again.

The greatest price increases, however, will be applied to business insurance. Depending on the overall risk experience of your industry and of your business in particular, the increase could be anywhere from annoying to devastating.

Here are some real-life, recent examples we recently worked on.

  • Pizzeria in a mall 'food court': Local agent delivered a renewal policy with a 31 percent premium increase. No claims last three years, no visible problems.
  • Pizzeria in a strip mall: One prior loss – at renewal the insurance company cancelled the policy. Their local broker could not find insurance coverage for the renewal. The pizzeria remained uninsured for almost four months until referred to our office.
  • Pizzerias in General: One local regional carrier left the workers comp market place entirely due to loss of re- insurance.

Impact #2: Some businesses won't be able to get insurance at any price. If the loss experience of your industry has been generally unfavorable, there will be some major changes in the availability of insurance. If you previously got your insurance in a standard market, tighter underwriting may now force you to shop "non-standard" markets.

Even if your particular business has an excellent loss and safety record, your industry's record may make you undesirable to standard insurers. And if your business and/or industry are questionable risks, you may not be able to get insurance at all. Note: Delivery liability was tough before Now it may become a NIGHTMARE!

Impact #3: Everything is going to take longer; more detailed applications, lengthier underwriting approval, work backlogs at the insurance companies. Your agent will be shopping more – not just for you, but for all his/her clients.

DON'T PANIC! Now, all is not lost. To "survive" this thing, you will need to keep your head and make some smart choices. The first thing is to avoid a slash and burn mentality. Don't start cutting up your insurance coverage without a careful review. You must take some time with this and speak with your agent/broker. The list of 12 Tips that follows will give you some solid ground to start with.

  1. Be sure your insurance is providing proper coverage amounts. You may be dangerously underinsured in some instances, or paying for coverage you don't need in others.
  2. Cooperate fully with your agent. This is not the year to put-off phone calls and wait until the last minute. The insurance underwriters are going to be reviewing everything, and that's going to create a work backlog. Wait until the last minute and you may find yourself with no insurance at all!
  3. Provide all information your agent needs as quickly as possible and make sure he/she has your e-mail address and fax number for fast communication.
  4. Know the company you are insured with. What is their financial condition? Make sure your agent places your business with a financially stable company. Discuss this with your agent. (We're predicting the decline of many insurance companies in the coming turbulent period.)
  5. Comply with recommendations from company engineers and loss control. Remember all the things the loss control department has been asking you to do for years to improve safety and reduce risk? If you haven't done them yet, do them now!
  6. Take steps to create a safe environment any company would want to insure. Safeguard your property to reduce the risk of theft and damage. Then, make a list of the actions you've taken to reduce your risk and have your agent use that list when negotiating your rates.
  7. Minimize your claims. The businesses that will get the highest rate increases, or not be able to get insurance at all, will be those with frequent small losses or who ignored loss control recommendations.
  8. Consult your agent and loss control before proceeding with construction or installation. Make sure any new equipment or buildings are installed or constructed in a manner desirable to the insurance company.
  9. Save money: increase your deductibles and retain more risk. Most companies look favorably upon clients with higher deductibles. It shows you are willing to cover the small day-to-day stuff, and use your insurance for large losses – as it is intended. This will help lower your rates, too.
  10. Most individuals, families and business are under-insured! Do a thorough review of your coverages to make sure you have insurance in place for exposures that are critical to the survival of your business, and to eliminate any that are no longer needed.
  11. If you absolutely must lower your costs, you may want to temporarily suspend "non-critical" coverages. Of course, you would be retaining the risk of loss yourself in this case. Make sure that whatever you "suspend" is quantifiable (you know the maximum possible loss) like glass replacement, then fully discuss this with your agent.
  12. Use an agent that knows your business. Many pizzerias are underinsured and don't know it until tragedy strikes. By using an agent or broker that knows the pizza biz you have a head start – no 're-inventing the wheel!' Your agent should have access to several alternative markets to shop the account when necessary.

The dramatic conclusion

  • We've enjoyed a "soft, easy" insurance market for over 10 years. Those days are over. A dramatic insurance crisis is around the corner. (For some it's already here.)
  • Insurance will become a more important part of everyone's life. You'll be paying more. You'll be spending more time making sure you have the protection you need.
  • You must make your agent a trusted advisor to your individual, family and/or business.
  • Review a "Financial Stability Checklist" with your family and/or business associates. Discover what you can do to save money, save time – and get the protection you need.
  • Do not delay. The saddest words an agent ever hears are "I never thought it could happen to me " Ultimately, you're responsible for your own insurance buying decisions. Be a smart consumer.

A final note. The information in this article is based on the most current and complete information available today. The insurance marketplace is dynamic and moving. Some parts of the country may be affected more than others and a very few may feel nothing at all! Whatever happens, now is the time to be 'heads up' and pro active.