Terrorism takes a toll on business premiums
"Our customers took their biggest rate increases last year. And I believe 2003 will bring more rate increases, but not as high," he says.
Riesch believes that most of the large insurance carriers are budgeting for a 10% to 15% net rate increase this year.
"The regional companies are looking for a 5 to 10 percent increase. And workers comp across the country is projected to be $22 billion under reserve," he says. "So you can look for those rates to continue to rise in Wisconsin, possibly 10% by next July."
Riesch says it’s important for businesses to understand that insurance carriers are scrutinizing their own profitability and are also looking more kindly at businesses that are operating profitably and safely.
Businesses can help limit their own insurance cost increases, Riesch says. Companies must concentrate more on safety at their job sites, he advises. They must keep their facilities in good repair. They must look carefully at product liability. They must make themselves better businesses to insure if they want to keep their rates under control, he says.
When the horror of 9/11 hit this nation like a hammer blow in 2001, the insurance business, like most sectors of the economy, was adversely affected. What had been a firming business insurance market since the middle of 1999 then turned into a "hard" market, Riesch says.
"9/11 obviously caused a lot of insurance companies a tremendous amount of pain," he says. "The losses they took, coupled with the losses that reinsurers incurred, forced the industry into what I would call a very hard market, which is continuing into 2003."
The property-casualty industry, which is usually cyclical, had been experiencing "a significantly down" market since 1987, their last "up" year, Riesch says. The decreasing rates for about 12 years also included workers comp in Wisconsin, where Wisconsin had seen rate decreases through the latter part of the 1990s, he says.
"Probably the single largest factor causing a hard market for the standard insurance carriers — CNA, Hartfords, Travelers, Wausau, St. Paul — and the regional carriers, such as West Bend Mutual, is their reinsurance contracts. With the reinsurers, the market had gotten so soft, even prior to 9/11, that they weren’t making money," Riesch says.
"So when reinsurers come out to negotiate reinsurance contracts, they pass a lot of rate to the standard carriers; and they’re changing the terms and conditions. They may be excluding terrorism, which had never been excluded in the past. They could also be excluding mold and other construction defects," he says.
Thus, the standard carriers have to cover the vast majority of those types of losses on their own paper, which can cause them a lot more pain, he says.
"They now have to underwrite business much more carefully. They’ve got to look more closely at accounts from a profit-and-loss standpoint. And to do that, they’re starting to beef up their underwriting and safety engineering staffs. They’re also looking at their customers with a magnifying glass to see if they can make money on those accounts on a standard rate basis," Riesch says.
"So the reinsurance side of the business has caused tremendous problems for the standard carriers. In many cases, they’ve had to get out of certain lines of business because they are now responsible for a lot more of insurance losses," he says. "That’s hitting all the carriers in every single line: worker’s comp, general liability, professional liability and automobile insurance."
Another factor that is hurting the business insurance sector is today’s uncertain investment picture, Riesch says.
"The economy and the stock market in general has impacted the cash flow of some of the insurance carriers. They still have to be profitable day in and day out at what they do, so they have to correct the situation," he says.
Riesch points to another factor that’s been in the news of late: the circumstance of national companies hurting and going out of business, whether they are accounting firms or large technology firms employing thousands of people.
"Going into Chapter 11 or Chapter 7 taints the entire financial services industry. How they are running their businesses is now under the microscope that much more," he says. "That causes insurance carriers to scrutinize liability insurance for directors and officers. After what happened to Conseco and Arthur Anderson, they know they have to get sufficient rate to cover those claims."
Capacity is another factor, according to Riesch.
"Because carriers today are upping their rates, companies such as Standard and Poor, and Best keep very close track on how the carriers are doing," he says.
"The carriers can’t go out and wildly write premiums because they have to keep the premium-to-equity ratio in balance."
Riesch says it’s important to understand that businesses today, large or small, must invest more emphasis on safety engineering, housekeeping, safety practices and claims management to improve their insurability.
"If they do, they’re going to take smaller rate increases," he says. If they have good loss ratios, that will be to their benefit. That will be true of 2003 and probably 2004."
Jan. 10, 2003 Small Business Times, Milwaukee
