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Insurance Rates Are Going Down
 For many businesses, insurance is a major expense item. In order to forecast premium budgets, business owners should become familiar with the current state of the insurance market and how it may affect their renewal pricing.
For the most part, rates have come down. Two years ago, average rates were increasing at an annual rate of 18%. In July 2004, they were increasing at a rate of only 5%. This year, on average, rates have been decreasing by 5%. The question now is how low will prices go?
Industry Outlook for 2006
All of the experts consulted at the time this article was written attached caveats to their projections, such as “barring any abnormal catastrophic activity in 2005,” and most of their projections were made prior to Hurricane Katrina.
The impact of what will certainly amount to the largest insured losses from a natural disaster in U.S. history remains to be seen, but outside this one event, the insurance industry has actually been quite healthy.
Net written premiums increased 4.8% in 2004. Policyholder surplus has grown more than 40% since 2001 and has reached an all-time high. In 2004, the industry’s Combined Ratio (loss payments plus expenses divided by premiums) dropped to less than 100% (to 98.1%) for the first time in decades. In other words, the industry actually earned an underwriting profit.
What Does This Mean to Businesses?
Each line of business is different, and each individual account is rated based on various factors. Two companies in the same industry can have dramatically different rates depending on the firms' loss histories and business and safety practices. Nevertheless, some conclusions can be drawn based on what we know.
Property, general liability, automobile and excess liability for preferred industries or businesses collectively comprise what the insurance industry calls the “standard market.” Most insurance companies are still maintaining a high degree of underwriting discipline, rewarding those firms with good loss histories as well as solid business and safety practices. It is anticipated that this market will remain competitive at least though 2006 and possibly 2007.
Developer and contractor general liability is basically split into two different areas — commercial and residential. On a composite basis, commercial contractors have seen rates come down approximately 7% over the last year. Experts expect the downward trend in rates to continue over the next 12 months, mainly because four or five quality insurance companies are now interested in insuring commercial builders.
Residential construction is entirely different. Although no sharp increases in rates have occurred, a big improvement from previous years, there have been no rate decreases either. Most underwriters are trying to retain their current rates.
At the same time, coverage restrictions continue. In addition to exclusions in the standard coverage form, it is not uncommon to see additional exclusions pertaining to prior damage, multifamily housing, subsidence, mold, silica, EIFS — the list goes on. Carefully evaluate each prospective program to understand the coverage that is being offered.
Today, it is increasingly more difficult to get additional insured status for completed operations. The current endorsements being offered by most companies are restricted to ongoing operations.
Some underwriters are starting to realize that they provide broader coverage under contractual liability provisions than they do under additional insured endorsements. As such, contractual liability is starting to be rewritten to track with additional insured endorsements.
Multifamily Exclusions
Almost all general liability policies in the market today for developers and contractors contain multifamily housing exclusions. The only way to insure these projects is with an Owner Controlled Insurance Program (OCIP), or “wrap-up,” policy. Although the market for OCIPs has improved over the past year, these policies are still extremely expensive — in the 1.5%-2% of sales cost range for a $2 million limit — and they are subject to minimum premiums that are about half the limit offered. The minimum premium for a $2 million policy would be approximately $1 million. At a rate of 2%, business owners would need to generate $50 million in sales to hit the minimum premium.
Recently, a few new underwriters have entered the OCIP field. Some are offering lower minimum premiums on smaller projects. In addition, some underwriters are now allowing selected developers to combine several projects under one policy, which will lower the per-unit cost for the insurance.
Professional liability rates have leveled off and have started to decrease on preferred accounts. However, rates are not dropping dramatically.
Workers Compensation Insurance
Businesses that renew within the first six months of 2006 should see relatively significant rate decreases in the 15%-25% range. Clients renewing in the second half of the year also should receive rate decreases, but they will be smaller. Ultimately, the only way to accurately forecast 2006 workers compensation cost is to sit down with your broker, work though a projected 2006 experience modification and discuss what rates will be applicable for the company’s specific classifications.
Workers compensation insurance is more of a financing tool than an insurance product. Ultimately, through the use of experience modification, employers will end up paying their own claims. Because of this, the only way to control the premium in the long run is to manage the underlying cost. There are numerous strategies business owners can employ in audits, experience modification, injury prevention and injury management to effectively manage their workers compensation costs.
A Buyer's Market
Currently, it’s a buyer's market for insurance. The industry is earning a profit and making a decent return on equity; it has adequate surplus; and there is ample competition. Assuming a firm has a decent loss history and is otherwise acceptable from an underwriter’s perspective, it should see flat to modestly decreasing rates on its 2006 renewal premiums (0%-10%). In the case of workers compensation, these decreases could be even greater.
Jeff Cavignac is president of Cavignac & Associates, San Diego.
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