An unprecedented string of catastrophes around the world—everything from the earthquake in Japan to tornadoes in Missouri—has already made 2011 the most expensive year on record for the insurance industry. But risk managers will be relieved to know that the property-casualty insurance market is still healthy, and insurance rates are likely to remain stable.
The global insurance industry suffered $265 billion in losses as of June, exceeding the $220 billion record-loss set by year's end in 2005, according to analysis by reinsurance company Munich Re. In the United States alone, nearly 100 events have produced $27 billion in overall losses and $17.5 billion in insured losses so far this year, exceeding the 10-year averages of $11.8 billion and $6.6 billion, respectively.
Despite such dismal numbers, insurance experts and risk managers say that such catastrophic (CAT) losses haven't yet resulted in substantial changes in the insurance market. “A hard market has to be coupled with a change in capacity, and we haven't seen that yet,” Brian Elowe, managing director of global risk management for insurance broker and risk adviser Marsh, said during a Webcast on insurance industry trends.
In fact, a recent survey of risk managers conducted by the Risk and Insurance Management Society found that the average renewal premiums declined for all four lines of business tracked by the survey. Property insurance saw the largest decrease, falling 4.2 percent on average for policies renewing during the last quarter. The average workers' compensation premium fell 3.2 percent, the average directors and officers' (D&O) premium 2.3 percent. General liability fell the least, 0.8 percent.
That doesn't mean rates will remain stable. The market is “susceptible and vulnerable to the changes in interest rates and equity rates,” which eventually become a determining factor in insurance adjustments, Elowe warned.
The downward trend in insurance rates also doesn't apply evenly across the board; some insurance purchasers can expect pricing adjustments in certain categories. “Certainly clients that have big losses and huge CAT exposures are having at one end of the spectrum some adjustments in property premiums,” Elowe said. “And at the other end of the spectrum, you have some insureds with no CAT exposures enjoying flat to reduced premiums year-over-year.”
Some risk managers have already begun negotiating premiums for 2012. As a telecommunications company, Global Crossing is in a sector where rates continue to go down on the property side, and have bottomed out on the casualty side, Len Resto
, director of risk management for the company, said during the Webcast. They also have “bottomed out for the most part” on the financial services lines, he added.
As a result, Global Crossing's insurance-buying decisions have changed. For example, the company lowered its retention (that is, the deductible it must pay before insurance kicks in) from $250,000 to $100,000. “That seems counter-intuitive but that's how we saw we could achieve the greatest savings,” Resto said. “Where there is plenty of capacity and underwriters are trying to make their numbers, I think you'll see anomalies like that, where lower retentions are going to probably be the order of the day.”
“I try not to have the economy and other outside influences affect the strategy, so that way if the market ever did turn hard, it's not impacting me.”
Vice President of Risk Management,
Great Atlantic & Pacific Tea Co.
Richard Sarnie, vice president of risk management for Great Atlantic & Pacific Tea Co. had a different take on purchasing decisions. “I try not to have the economy and other outside influences affect the strategy, so that way if the market ever did turn hard, it's not impacting me,” he said. Instead, Sarnie bases purchasing decisions on who offers the best price. If the market gets soft, it may be worth giving up premium savings to get enhancements to coverage terms that some providers include to attract buyers. “At the end of the day, the reason you buy insurance is to get the claim paid, and if I can get some additional coverage thrown in and keep my premium the same, than that's a win-win,” he said.
Insurance brokers are also subtly changing how they structure their fees. “I wouldn't say there is an overwhelming trend away from fees to commissions, but there is a higher utilization of commissions as part of a compensation structure with the brokers,” Elowe said.
Still, whether the insurer offers a broker commission or not doesn't alter the price the insured company ends up paying, Sarnie said. “Whether it's derived through commission, fee, or a blend—which is what Great Atlantic & Pacific Tea Co. does—I want to know that I can negotiate different portions of it focusing on total cost of risk.”
For some buyers, the clarity of the broker-fee arrangement is more important than the specific structure. “I'm all about transparency. All I want to know is where the money is going,” Sarnie said. He added that he will negotiate with brokers and insurers directly on those components.
At Global Crossing, two brokers work for the company and both are paid on a fee basis, which Resto said is the “fairest way” to do it. “You certainly don't want to see a broker over-compensated in a hard market when premiums are high,” he said. “At the same time, you don't want them to be under-compensated when the market is soft.”
NATURAL CATASTROPHE STATS
Below are two charts from Munich RE NatCatSERVICE that provide details on the natural catastrophes occurring in the first six months of 2011:
Source: Munich RE NatCatSERVICE.
Webcast panelists also discussed the importance of watching the experiences of other companies to gauge industry-related losses and trends. “Just because a client has not had a loss themselves, it doesn't mean it's not important to understand what their industry sector could be facing as exposure,” Elowe said.
To that end, Resto and Sarnie directly contact risk managers of industry peers that have suffered losses to gain insight on their experiences. “If I can learn from them and apply those strategies within my company, then we all win,” Sarnie said. Analyzing the causes of others' losses also helps to establish a quantitative discussion around the best use of insurance capital and where potential losses may arise, Elowe added.
Risk managers on the Webcast stressed that insurance cost is only one element out of many they consider in factoring their total cost of risk. Both Resto and Sarnie agreed that the environmental, health, and safety functions should report to risk management to capture all the costs associated with risk management effectively.
Those costs, for example, include safety costs associated with loss prevention programs, internal and external administrative costs, workers' compensation, potential legal costs, and more. By not including such risks in the company's overall potential losses, risk managers are “kidding themselves,” if they think they're really getting a total cost of risk, Sarnie said.
For a comprehensive view of a company's risks, risk managers need to escape the mindset that insurance is the only factor in measuring total cost of risk. “It's not just about insurance,” Sarnie stressed. “Break out of that box.”