Small Businesses Face Property Insurance Hike

Organizations with a Market Capitalization of Less than $300 Million may be Paying Higher Insurance Premiums

Catastrophic risk is of increased concern to insurers, and small businesses without losses will likely face increased premiums of 10-20 percent on renewal next year. Why? Wildfires, cyber-crime, cloud computing risk, and workers compensation rates are some reasons insurers cite.

While it was expected that insured losses from 2011 natural catastrophes would send property-insurance premiums skyward, increases were only slight. But the upward trend appears to be gathering momentum, especially for organizations with a market capitalization of less than $300 million, according to insurance-industry experts.

Rates in the global insurance market generally firmed in the second quarter of 2012, according to the Marsh Risk Management Global Insurance Index. The report found that property-insurance rates went up in the second quarter of 2012. In the United States, companies without losses generally saw increases of between10% and 20% at renewal, Marsh says. The index tracks the annual changes in rates for Marsh client renewals in a particular quarter. Renewals are in 20 major countries in the property, casualty, and financial and professional lines of insurance. Asked how many of their clients were surveyed, Marsh would only say the number was in the “thousands.”

A multiyear downward slide in liability-insurance rates also appears to be steadying as general-liability and professional-liability insurance rates stabilized during second-quarter renewals of insurance policies in most major geographies.

While property-insurance rates for insureds with moderate-to-heavy catastrophe exposures climbed significantly in loss-affected regions, insureds without such exposures generally saw rates stabilize. The rise was driven by unexpected losses from the major catastrophes of 2011, increased focus by insurers on the data provided by insureds, a rise in attritional losses (losses other than those related to major catastrophes or exposures),and changes to insurers’ calculations of their retained risk. These are the funds or capital specifically identified to pay for the risk that is not transferred to an insurer, according to Marsh.

The report also found that even with increased reliance on technology, pricing in the global cyber insurance market remains flat, mostly because of competition from new insurers entering the market.

Lance J. Ewing, hospitality and leisure industry practice regional leader with Chartis, an insurance company, says he has seen an upward trend, with rates getting higher in property lines and some casualty lines, notably workers’ compensation. In the property marketplace, he notes, premiums have been rising “for a fair amount of time.” Increases in workers’ comp predominately stem from the fact that many insurance carriers are running at a more than 100% combined ratio, he explains.

The combined ratio is a measurement of the percentage of premiums an insurer must pay out in claims and expenses. Ewing points out that some insurers’ combined ratios are in the 120 range, which means “the workers’ comp marketplace [as it is] can’t be continued in the long term.” He sees directors’ and officers’(D&O) coverage increasing mainly in terms of executive-liability coverage, depending on the risk factors involved.

Ewing also observes that cyber liability is becoming more of a concern at the board level. The issue “certainly has the attention of board-directed risk committees, as well as risk managers, treasurers, and CFOs,” he says.

While chief information officers in many companies do an “admirable job” of protecting their organization from hacking or malware, “many times the intrusion occurs outside of the view of the CIO. It could be from the advertising division or the marketing side, human resources, or operations,” Ewing says.

According to Marsh, companies in the United States were more likely to experience rate increases than decreases in most major lines of insurance during the second quarter of 2012. Among the broker’s findings:

• Just over 60% of companies experienced increased property-insurance rates, a higher percentage than in the first quarter.
• Carriers are more closely scrutinizing exposure to wildfire and emerging risks such as cyber and cloud computing.
• U.S.guaranteed-cost workers’ compensation insurance has been more affected by higher rate increases than loss-sensitive programs, as underwriters target higher profitability levels. (Guaranteed cost means that only a change in the exposure base during the policy period would cause the premium to vary. With a loss-sensitive program, the final premium is dependent on the actual losses during the period the plan is in effect.)

The report also found that rates for D&O liability insurance stabilized following nearly a decade of decreases. Although the changes have been moderate, there are indications that rates are firming.

Companies with a market capitalization of less than $300 million were more likely to experience increases, Marsh says, with almost 50% seeing rates go up in the second quarter. By contrast, only 20% of companies with a market capitalization of more than $10 billion experienced increases.