Business premiums may go up

October 17, 2009
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A lack of available credit and a stock market that fell flat last year are the reasons many business owners are likely to see their insurance premiums rise in the very near future.

The insurance industry is pointing at those two negative influences as having distressed their financial capabilities to the point that insurers can’t hold down customer rates because their return on investments has declined over the last year.

“When we take a dollar in a premium and we invest that in the stock market, which is commonly done, we can generate a rate of return of $1.10, $1.15, and maybe even $1.20 or higher. Those dollars can then be used to make an insurance company profitable,” said John Karle, a principle and executive vice president at Crosby & Henry, an independent insurance agent that has offered commercial and consumer policies since 1858.

Karle said when the ROI is worthwhile, an insurance company can afford to pay out $1.10 or so in claims for every dollar it collects in premiums from a client. But when the market fell last year, as private capital went in droves to U.S. Treasury securities instead of to Wall Street, insurers saw their investments and returns diminish just like individuals saw their retirement and college funds take a dive.

“When we experience this reduction in returns, it’s going to drive up the premiums, ultimately, and that’s where the insurance market is heading,” said Karle, who has spent the last 37 years in the insurance business.

“We are currently in a marketplace that we would describe as changing. We are moving away from a soft insurance market where the insurance premiums are very soft, and by that we mean they’re very low. Underwriters are willing to take a dollar in premiums and invest it, and they’re willing to write risks that they may not normally be willing to write,” he said.

But now, Karle said underwriters aren’t as willing to write those risks, at least at the current premium level, because their investments aren’t providing the same returns. He also said commercial underwriters are examining the risk potential more carefully. He recently had one underwriter refuse to issue a policy because the client’s cash flow and credit score were seen as being too low.

Karle said the bottom line is the insurance companies’ boards of directors are saying they need to get a better return. Since the financial market can’t provide that return, premiums will be going up. The increases are likely to come next year — and not just in Michigan.

“I think when it does truly hit — and I think it will probably be 2010 when the insurance rates start to go up — I think we will see it industry wide and see it cross state lines, absolutely,” he said.

There are a few policy lines that may not see a premium hike next year; medical malpractice insurance is likely one of them. Karle said those rates have been very stable and competitive and he didn’t see premiums rising.

“I do see workers’ compensation rates starting to creep up. I see some property and liability rates creeping up, and certainly the group health insurance with the changes that are being discussed on Capitol Hill are going to ultimately impact the ability of an individual business owner to employ as well as obtain and retain adequate credit,” he said.

How big are the projected increases? Karle said group health has a recent history of rising by 6 to 8 percent and will likely go up by that much again next year. Workers’ comp, property and liability premiums could rise between 5 and 10 percent because credit is so tight.

“Five to 10 percent wouldn’t be out of line as we go forward through the years because there are so many more players in the property and casualty field than there are in the group (health) underwriting field.”

Even if credit starts flowing and the stock market begins a steady upward journey, Karle doesn’t see premiums dropping soon because insurance companies have to make up for the revenue they’ve already lost. On top of that, the industry’s business cycle has changed. Karle said it used to be that insurers and businesses could virtually count on a seven-year cycle: Rates would be soft for 3.5 years and then for 3.5 years, rates would go back up. That cycle was pretty common until a few years ago.

“Now we’re seeing much greater degrees of fluctuation. Softer rates are lasting longer. The last hard market we had was right after 9/11,” he said. “The property rates went up quite dramatically, and then six months to a year later, we were back into a very competitive soft market.”

Karle said the length of the current cycle is difficult to peg because the fallout from insurance giant AIG isn’t complete. AIG, which became too leveraged in the mortgage bundling fiasco, is a big writer of liability policies for officers and directors, and those rates could rise if the insurer falls even further. When there are fewer underwriters that want to participate in a given line of business, such as liability policies, premiums will increase.

“That may impact those premiums and the underwriters’ willingness to write it,” he said of AIG’s predicament. “The underwriters’ willingness to write gets defined by the number of carriers. It’s supply and demand.”

In addition to hikes on business insurance, the industry has said individuals with good credit could see rates soar on their homeowners and auto policies if the Michigan Supreme Court bans insurers from using credit ratings to set premiums. Karle said insurance companies have tried for years to develop other methods to set prices, but none have been more successful than credit ratings. He called that process the industry’s key tool.

“If the (Michigan) Supreme Court says that we can no longer use credit scoring, we are going to see significant rates increases on the individual homeowner and private passenger automobile owners who have good credit. I’ve heard a 25- to 30-percent increase,” said Karle.

“Conversely, if someone has a poor credit score, they’re probably going to get rewarded because their premiums are probably going to go down.”

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