Some businesses dropped by their carriers
Several southeastern Wisconsin businesses in potentially risky industries are finding their insurance companies are no longer interested in their liability, property and casualty business.
Other businesses are facing substantial insurance premium increases.
According to industry sources, multifamily building owners, school bus companies and high-risk companies such as asbestos remediation contractors are getting the boot from their insurers.
When they do find new homes for their policies, rates can be as much as 200% to 300% higher.
According to Art Josetti, a chartered property and casualty underwriter with HNI Risk Services (formerly HNI Company), New Berlin, adverse loss experiences determine which classes of business are dropped by insurers.
"If it is deemed a tough class by the insurance community – sometimes it is just an insurance carrier that has had some trouble with a type of class – the home office takes a stand," Josetti said. "Those accounts that have had poor loss experience have had a hard time finding a place to go. I have not had trouble finding a home for some people, but it might be at different terms."
While insurance rates for most commercial lines are escalating, the most severe increases and most of the dropped business are in very specific industry categories.
Habitational tough
"Anything that has hazardous waste – asbestos removal," Josetti said, outlining the more volatile industries. "School buses. Habitational – apartment buildings – have been tough."
Milwaukee-based multifamily real estate magnate Jim Wiechmann of Wiechmann Enterprises concurs with Josetti’s characterization of the market as "tough." Wiechmann, who earlier this year purchased the Stevens Point Beverage Co., owns about 1,000 units in Wisconsin and Florida.
Wiechmann was dropped, along with other Wisconsin-based multifamily real estate owners, by Ohio-based Westfield Group. Wiechmann attributed much of the insurance restructuring to the declining stock market.
"It is cyclic," Wiechmann said of the skyrocketing premiums for multifamily owners. "Whenever the stock market takes a dive, the insurance premiums go up. They collect the money on it, they invest it in the stock market and they pay out their claims one or two years later."
Westfield’s Wisconsin divestiture was caused in part by adverse loss experience here, according to Wiechmann.
"Westfield vacated almost everybody in the state," Wiechmann said. "One of the agencies wrote some major policies for myself and other friends of mine who own properties in the Fox River Valley. Hail storms took out a lot of roofs in 1999. … And they decided this was a market they couldn’t have that kind of exposure in."
Other insurers are trying to move into the multifamily business in the wake of the departures of companies such as Westfield.
Sheboygan-based Acuity issued an alert to its agents earlier this year, indicating the company expected to pick up $9 million in new habitational business in 2002. However, some selectivity will be practiced. Buildings older than 20 years need to be referred to underwriting prior to bonding.
The May 22 memo also stresses that Acuity will aggressively pursue "premium adequacy" as "historically, the biggest problem with the habitational class has been premium inadequacy. We feel the market currently supports profitable growth."
Spreading it around
Wiechmann worked with his agent, Chuck Schultz of Security Insurance and Financial, to find new policies for his business. While Wiechmann was able to secure the necessary policies, the cost of coverage has spiked.
"We had to spread out the policies," Wiechmann said. "We actually have Lloyd’s of London on some secondary coverage."
Other insurers now covering Wiechmann’s properties include Arizona-based Scottsdale Insurance Co., Indian Harbor Insurance Co. of Connecticut and RLI Corp. of Illinois.
Premiums for Wiechmann’s properties have "escalated considerably," he said. "Some parts of the coverage have gone up by 300%. Other parts have gone up over 200%. … Sometimes it doesn’t make a heck of a lot of sense. Your loss to premium ratio might be 25% to 75%. But they make all their blasted money off their investments. They will keep writing insurance policies competitively until the market changes, and then they have to divest."
Chris Kondrick of AON Risk Services of Wisconsin stressed that while the stock market decline was affecting premium hikes, other dynamics also are factors.
"Sept. 11 is one factor affecting the insurance industry," Kondrick said. "The downturn in the stock market is one of them, but insurance companies are regulated in what investments they can get into. They can’t purchase the same variety of stocks like consumers can. They will be into more conservative investments that are highly liquid."
Commercial insurers are facing increased premiums themselves as the re-insurers they rely on to share their risk struggle to cover their losses from Sept. 11 and the failures of surety bonds issued to Enron and K-Mart.
Construction premiums creeping up
While insurance carriers are increasing premiums for construction contractors incrementally as the year progresses, insurers are not dropping many contractors, according to Kondrick.
"Every insurance company’s costs are going up," Kondrick said. "All of the underwriters are being asked to be more selective and to make sure they collect enough money to return to profitability. There are some companies that are very, very heavy into construction.
"CNA was heavy into construction, but they pulled back. Their book of business in the construction field was underpriced. As prices rise, they are getting back into the construction market – and they were the biggest construction writer in the state of Wisconsin."
As premiums rise to reflect the new cost structure, contractors are feeling the effects.
"All of our insurance is shooting through the roof," said Norm Yerke, chief executive officer of Mega Construction, Waukesha. "The alternative is cancel it or pay it. I have chosen to pay it, but I don’t know how small-business men and women will be able to keep up."
Jim Pankow, president of Plymouth-based Jim Pankow Construction, managed to get by with a minimal increase when he renewed his commercial lines in January.
"Fortunately, our renewals came up early in the year," Pankow said. "Although we did see some increases, they weren’t what I am hearing is happening in other places. We have been with the same agency for 25 years. That may help. It is an independent agency. I am expecting to see a major increase in the future. We are definitely not going to be immune from it."
"In the construction field right now, it is happening across the board to all contractors, regardless of the type of contractor you are," Kondrick said. "The best way for construction contractors right now to manage the increase is to assume more risk and self-insure and control their losses. You can assume more risk by accepting larger deductibles. Or instead of $20 million in umbrella coverage, you take $10 million. Or maybe you do without three or four coverages that used to be throw-ins that now people are charging for."
Mark MacDonald, CFO at Beyer Construction, New Berlin, sees the modest bump the firm saw in its commercial insurance costs as the result of many years of static premiums.
"I don’t know if it is a factor of not wanting to do business in Wisconsin as much as insurers raising premiums to reflect their costs," MacDonald said. "We were able to hold our increase to 25%. We renewed March 1 – and I know things have increased substantially since then. But I saw the rates drop every year until two years ago. You know they were selling stuff below their costs just to get the premium in."
Kondrick, who writes Beyer’s policy, said a 25% increase in this market is something to be happy about this year.
"We’re seeing property insurance premiums increase by 40% to 200%," Kondrick said. "Umbrella is up 80% to 600%. If somebody is out there getting a 25% increase, they should grab it and run."
A more modest double-digit increase may be harder to come by as the year progresses, however. Kondrick indicated that many carriers renew their contracts with re-insurers between July 1 and Jan. 1.
"We’ve seen an additional 20% to 30% escalation in the last few months," Kondrick said. "A lot of insurers don’t really know what the cost of their reinsurance is going to be. They are hedging on the fact that they are getting an X percent increase. But they will have to see what the reinsurance is once the ink is dry."
State regulation a factor
According to Josetti, the fact that property and casualty insurance rates are regulated more tightly in Wisconsin than in some other states contributes to the number of dropped businesses. The Wisconsin Compensation Rating Bureau reviews data on claims in various sectors and sets a ceiling for the premiums.
"If the company feels that the rates are inadequate in a certain class, they are going to stay away from it," Josetti said. "If they feel the rates are high and they can make a buck, they are going to go after it. For instance, the roofing/construction rate has changed some, and has it gone up. But has it gone up enough? In Wisconsin, we are state-rated, while other states like Illinois and Iowa are open-rated states. The carriers can use the rate the state has suggested or they can debit or credit it."
Sept. 13, 2002 Small Business Times, Milwaukee
