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February 2001 • Volume 8, Issue 1
In this issue
Health Care Costs increasing
Employers in the United States will be hit with double-digit health care cost increases in 2001. Rising prescription drug costs and hmo pressures are driving major cost hikes. For 2001, we can expect average increases of 10 to 13 percent, depending on the type of health plan. This comes after last year's rate hike of 9.4 percent, the highest increase since the early 1990's.
Some companies will absorb the majority of next year's rate hikes, but many will pass along at least 25 percent of the increase to employees. With the average health plan projected to cost $4,707 per employee next year, up from $4,222 in 2000, that means most employees will pay $125 more for their health coverage next year.
Cost Increases by Plan Type
The following table illustrates the average cost increases companies can expect to receive in 2001:
| Type of Plan | Percent of Increase | Increase in Average Cost Per Person |
|---|---|---|
| Preferred Provider Organizations | From $4,249 to $4,674 | |
| Point-of-Service Plans |
From $4,298 to $4,727 |
|
| Traditional Indemnity Plans | From $4,996 to $5,595 | |
| Health Maintenance Organizations | From $4,059 to $4,586 |
These dramatic cost increases are a major concern as this marks the third consecutive year companies have been hit with significant cost increases. With today's tight labor market and fierce competition for talent, companies are doing everything they can to not pass along the increases to employees, but with the continued rate hikes they simply cannot afford to cover all the costs. Unfortunately, employees will have to pay more out of their paycheck for health care.
Cost Increases Across Major Metropolitan Areas
Cities in the Central United States were hit particularly hard in 2000, with rate increases of 12.6 percent in Denver, 12.2 percent in Dallas/Fort Worth, 12.1 percent in Cincinnati, 10.9 percent in Houston and 8.6 percent in Chicago. Other cities that experienced major increases include Newark with 10.1 percent, along with Boston and San Francisco with 9.7 percent.
Employer Reaction to Rate Increases
How are organizations reacting to the rate hikes? In addition to passing along part of the increase to their employees, companies also are making design changes for prescription drug plans. Because skyrocketing drug costs are a major driver behind the insurance hikes, many organizations are changing their prescription drug coverage by moving toward a three-tier system, where employees pay the least amount of money for a generic drug, more for a brand name drug on an approved formulary list and the most for a brand name drug that isn't on the list.
Employers also are making design changes to their managed care plans by increasing co-payments for office visits and providing heftier out-of-network penalties.
Companies with employee populations that have a high prevalence of specific health conditions, such as asthma, diabetes or heart problems, are starting to contract with health plans that offer programs specializing in those areas. In doing this, their employees receive more specialized care to assist in managing their conditions, and as a result, their health care costs usually decrease.
What can you do? First you need to know what is driving your costs. Hard statistical information is needed. There are no simple answers. If you don't know what is causing your claims, how can you solve the problem? A plan will pay for the damage that smoking causes, but it will not pay for smoking cessation classes.
Commercial Insurance Market Index Shows Continued Hardening Trend
Forecast for Property/Casualty: Continued Rough Weather
The Council of Insurance Agents and Brokers says that property-casualty rates for small, medium, and large commercial lines continued to rise between July 1 renewals and September 30, 2000. Data comes from the Council's Commercial Insurance Market Index for the third quarter 2000. The Index is based on a quarterly survey of The Council's member firms, which the group says "represent the top one percent of agents and brokers in the United States, and who place over 80 percent of all commercial insurance premiums."
The Council reported significant rate increases on commercial auto, workers' compensation, property, and general liability. Cost reductions that were almost automatic in the Primary Casualty Market in prior years have largely disappeared and been replaced by moderate increases. The Workers' Compensation component of this market has especially shown increasing signs of instability as loss ratios mount.
Worker's Compensation
Efforts to reduce the overall cost of risk in Worker's Compensation were highly successful over the past decade. As effective controls in the loss component of the market's results took hold, underwriting results improved dramatically to the point where the combined ratio for Workers' Compensation insurers fell below 100 in the mid-1990's. Since then, however, the competitive zeal in both the insurance and treaty reinsurance markets to reduce rates and retain market share has taken an ever-greater toll. Workers' Compensation premiums in 1999 declined by 1.7% and the combined ratio for Workers' Compensation has steadily risen to the point that the 1999 estimated 2000 results are now mirroring the ratios that operated in the worst point of the hard market of the mid 1980s.
As a result of these rapidly deteriorating underwriting results and the exodus of support from the reinsurance market, workers' compensation rates / premiums hardened throughout last year. But the recent increases in pricing may only stem the bleeding but not heal the wound; as A.M. Best recently observed, "[insurance] price increases will be offset by medical-cost inflation, which continues to compress margins in both workers' compensation and general liability lines."
While discounted guaranteed cost programs were available for several years, the deteriorating Workers' Compensation results and the hardening of the treaty reinsurance market for Workers' Compensation have caused insurers to limit the availability of this approach. We expect that most major insureds who took advantage of the low rates and the budgetability of these discounted guaranteed cost programs should now anticipate that returning to a loss-sensitive program approach will become the more economically attractive option at the next renewal.
Umbrella
While the index indicated there has been no change in umbrella pricing, we have seen increases of from 10-50% in the umbrella pricing of our January 1, 2001 renewals. Poor underwriting results driven by both frequency and severity losses have caused many umbrella carriers to adopt a more conservative underwriting approach. Pricing increases, especially in lead layers, have become more prevalent in the excess market. As the number of carriers willing to compete on lead business has declined over the past year, the trend of annual premium decreases has been reversed. Although capacity is still plentiful in excess layers, underwriters are increasing minimum premiums to $1000 per million of capacity. Historically umbrella programs have accepted $1,000,000 attachments for most underlying coverages. The claim activity, especially in auto, has caused some carriers to require increases to $2,000,000. In addition, the availability of cost inclusive underlying programs is diminishing.
The following charts give national response breakdowns to a Property and Casualty Market Survey conducted by The Council of Insurance Agents and Brokers. The survey, which was released in November 2000, covered the period July 1 to September 30, 2000.
Compared to 3 MONTHS AGO, how has commercial property-casualty pricing changed for the following categories?
| Down >10% | Down 0-10% | No Change | Up 0-10% | Up >10% | N/A | |
|---|---|---|---|---|---|---|
| Small (<$25K Comm. & fees) | 0% | 2% | 25% | 47% | 26% | 0% |
| Medium ($25 - 100K) | 0% | 0% |
3% |
43% | 54% | 0% |
| Large (>$100K) | 0% | 0% |
6% |
39% | 49% | 6% |
Compared to 3 MONTHS AGO, how has the market (pricing and underwriting) changed in the following lines of business for medium and large accounts?
| Very Soft | Somewhat Soft | No Change | Somewhat Hard | Very Hard | N/A | |
|---|---|---|---|---|---|---|
| Auto | 0% | 0% | 10% | 74% | 16% | 0% |
Workers' Compensation |
1% | 1% | 18% | 53% | 27% | 0% |
| Property | 0% | 1% | 16% | 65% | 18% | 0% |
| General Liability | 0% | 3% | 30% | 63% | 4% | 0% |
| Umbrella |
1% | 2% | 54% | 38% | 4% | 1% |
The first casualties of the loss portfolios accumulated during the prolonged soft market surfaced early last year as both the Reliance Insurance Group and Frontier Insurance Group deceased or severely curtailed their underwriting operations. When Reliance Insurance Co. stopped writing business earlier this year, one insured was forced to seek a new property and casualty carrier for his general contracting firm. When he found one, he had to pay about 30 percent more for the same coverage. That insured is not alone. After enjoying a decade of low prices for property and casualty insurance coverage, businesses now are facing sharp premium increases. Some companies may be hit harder than others may, but it appears that no one--not even those who renew with the same carrier--will escape a larger bill.
Small businesses with little commercial risk might see a moderate increase of 5-to-10 percent; companies with severe exposure to risk could see rates double. If you happen to have a colorful loss history, it could be even more.
Casualty insurance covers the policyholder when other people are injured or their property is damaged, and includes automobile and theft protection. Property insurance provides coverage against harm to the business owner's own property by fire, vandalism, weather and the like. Observers said that while both property and casualty rates are increasing, casualty line prices have been rising at a slightly faster pace.
Traditionally, the insurance market went in three-year cycles, with three years of a hard market and higher prices followed by three years of a soft market and lower prices. But after the liability crisis of the 1980s, when prices were high and coverage was difficult to come by, everything changed. Insurance companies had built up large surpluses, the high interest rates of the '80s had come down, and the decade-long buyer's market began.
But 2000 began with insurance companies feeling a pinch on their bottom lines. Loss ratios were rising even without the natural disasters of previous years and underwriters' expenses were rising too. The overall property/casualty industry will likely report a combined ratio of at least 108 for this year, up from 101.6 only three years ago.
Perhaps the most compelling quantifiable evidence signifying Property insurers' / reinsurers' eroding financial condition is in the significant increase in combined ratios (expense and loss ratios versus written premiums) among major carriers. Catastrophic losses were a major contributing factor to the underwriting shift in the 2000 Property Insurance market. The trend of increasing insured losses from natural (earthquakes, floods, hurricanes) and man made (fires, explosions, building collapses, etc.) catastrophes continued in 1999. Globally, last year was the second most expensive year for reinsurers, surpassed only by 1992, the year Hurricane Andrew briefly changed the property market. U.S. tornadoes, quakes in Turkey and Taiwan, Typhoon Bart in Japan, Hurricane Floyd, European storms Lothar and Martin and several large U.S. industrial losses all contributed to a miserable year for underwriters and reinsurers. Storms of late last year in France, Germany and Denmark demonstrated to European underwriters how vulnerable they are to catastrophe losses and how unprepared they have been to properly evaluate global catastrophes.
The principal problem seems to be that in addition to the higher loss ratios, carriers have been taking a beating on their investments--the main way they make money--in the difficult market.
Much of the increase is being driven by the reinsurance market. Reinsurers are the companies that insure underwriters, and when they suffer losses and raise prices, the carriers have little choice but to pass the higher costs on to policyholders.
The shift in the property market is being manifested in the following trends:
- Rates
- "Good" risks, i.e., those that were profitable from an underwriting perspective and that have minimal catastrophe exposure, are being assessed with 15% - 20% rate increases at renewal. Risks that have higher loss ratios and/or that have moderate to substantial natural catastrophe exposure are seeing higher increases (in some extreme cases, these are multiples of expiring premiums). The magnitude of the increases is also a factor of the expiring "base rate" against which the new pricing is measured. For companies that have multi-year deals that are now expiring, the disparity between the discounted multi-year rates and the new market rates may be particularly acute.
- Retentions
- Typically increased retentions can serve to mitigate rate increases in this market, but may not completely erase them. Minimum deductibles for catastrophic exposures are increasing across the board and meaningful caps on catastrophe risks are nearly impossible to secure. Carriers are now expecting large clients to assume large retentions and are charging commensurately for lower deductibles.
- Multi-year Programs
- Discounts for multi-year commitments have virtually evaporated from the market. Those insurers, who are still willing to lock into prospective pricing, are typically proposing costs with imbedded inflationary rates over time.
- Underwriting Scrutiny
- Underwriters are closely reviewing submissions and are analyzing the credibility of values, MFL and PML calculations, interdependencies, contingent exposures, and engineering reports (including verifications of compliance with recommendations).
Forecast for Executive Risk Insurance Market
The Fourth Quarter 2000 Directors & Officers Liability, Fiduciary Liability, Crime and Employment Practices Liability) insurance arena can be characterized as a tightening marketplace. Many carriers are reporting significantly higher loss ratios, most notably in the Directors & Officers Liability and Employment Practices Liability lines of coverage, and therefore have been significantly less flexible in offering broadened coverage at lower premiums. While some new carriers continue to enter the market, the expansion of carrier options is occurring at a much slower pace than in the past four years. And despite the range of competitors in the market, the almost automatic annual 10%-15% premium decreases and significant coverage enhancements that were once commonplace are now scarce if not extinct. Likewise, insurers are now reluctant to offer multiyear single aggregate programs or to "roll" existing multiyear programs out for additional years.
Directors & Officers Liability
Rather than offering broadened coverage and lower premiums, carriers are typically quoting premium increases or are charging additional premiums for broader coverage. While multi-year programs are available in selected instances, many carriers are increasingly reluctant to provide these programs as an option. When they are offered, rates for three-year programs are higher now than they were in years past. For example, in 1999 the common rates for a three-year single aggregate program were 220% – 250% of the annual premium. Now, for the same program, the factors are nearer 270% - 310%, if the multiyear option is even available. Two years ago it was common for "roll" pricing to be one-third of the three-year single aggregate price. Now, in those instances where the "rolls" are offered, the pricing for the additional year is typically the true, undiscounted annual premium.
In 1997, underwriters began to focus increasingly on compliance issues surrounding the Year 2000 computer problem and this scrutiny increased throughout 1999. From a D&O perspective, a variety of claims could have arisen from the Y2K situation, including shareholder claims alleging mismanagement and non-disclosure. A number of Y2K lawsuits were brought in 1998 and 1999, most being against software companies for supplying non-compliant versions of their software products. Most of the settlements to date have involved defendants providing free Y2K compliant versions of their software to customers. While most companies survived the magic date without material glitches, there was still an underlying concern in the D&O community that shareholders could file suits related to the massive amounts of time, energy and money that expended to ensure Y2K compliance.
Fiduciary Liability
Despite claim trends, the markets for Fiduciary Liability remain relatively competitive in the Fourth Quarter of 2000. Although we have seen some underwriters soliciting minor premium increases. While we expect the market to remain competitive, on an account-by-account basis, we anticipate that underwriters will seek higher premiums where there is an identifiable increase in exposure or when a serious claim has been filed.
Underwriting concerns of particular note continue to include:
- Employee stock ownership plans
- Mergers, acquisitions, divestitures
- Non-qualified plans which are often not pre-funded and which can present additional risk to participants if the sponsor company is acquired or goes bankrupt
- Cash balance plans
- Underfunding of defined benefit plans
- Reductions in benefits
- Plan terminations/modifications
Employment Practices Liability
While the market is growing in capacity, pricing in this product line is nonetheless tightening as claims frequency has increased significantly over the past two years. The total awards or settlements paid in cases filed with the Equal Employment Opportunity Commission (EEOC) rose from $145 million in 1996 to $210 million in 1999—a 38% increase.
Key factors contributing to this litigation trend include:
- A decline in the employment at will doctrine
- The aging workforce
- A larger number of law firms specializing in employment related cases
- Significant changes in the law including the 1991 amendments to the Civil Rights Act, enactment of the Americans with Disabilities Act, Age Discrimination in Employment Act, and Older Workers Benefit Protection Act
Truckers Slammed with Higher Insurance Rates
Just as the trucking industry is reeling from higher fuel prices, along comes another blow to the bottom line: Insurance rates, for both the truckers and the rigs they drive, also are shooting up.
Even with his company's excellent driver safety record, Bill Crites, president of Condor Freight Lines, said he will be paying 30 percent more for workers' compensation insurance on his drivers this year.
Crites also is bracing himself for sharp increases in the package of policies that cover his trucks and trailers. He expects his premium for cargo insurance alone to rise at least 60 percent this year, and said he'll be "dancing on top of my desk" if it climbs only that much.
Although rising premiums are causing sticker shock throughout the trucking industry, it shouldn't come as a complete surprise, said Crites, who runs his Los Angeles-based company from offices in Sacramento.
For the past several years, the industry has benefited from a soft insurance market, in which a lot of insurance companies engaged in rate wars to gain market share. This superheated competition drove premiums down to rates too low to last.
For workers' compensation insurance, the good deals ended early in 2000. Because workers' comp rates are scaled to the risk of on-the-job injuries within an industry, trucking companies could expect their rates to climb higher than the average. When the Workers' Compensation Insurance Rating Bureau of California, an insurance industry-backed group, issued its advisory premiums for 2000, the new rate for truckers was 25.9 percent higher than last year's. News of just how underfunded the workers' compensation system has become arrived last month, when preliminary estimates by the rating bureau showed that the premium dollars collected by workers' comp insurers are $4.7 billion short of what is needed to cover potential claims. That's nearly half again as big as last year's estimated $3.2 billion shortfall.
What these numbers mean is that some insurers run a serious risk of paying out more in workers' comp claims than they're collecting in premiums. It doesn't take an economist to see this as a recipe for failure.
Drivers and passengers are more likely to survive an accident with a big rig today, but their injuries may require costly medical treatment for years, and leave them unable to work or care for themselves for a while, or possibly for the rest of their lives.
What may drive the cost of truck insurance up more than anything else has nothing to do with accidents, however. Instead, it's the rise of cargo theft. A load of computers, for example, easily can be worth more than the truck and trailer hauling them, and cargo insurance is expected to boost the cost of truck policies more than any other part of the package.
In general, trucking companies can expect to be hit harder by rising insurance premiums. The number of on-the-job injuries suffered by drivers puts the industry on the high end of the risk scale compared to other industries.
Truck drivers are especially likely to suffer back injuries, which can be costly to treat and impossible to fully cure. The trucks, trailers and the cargo they haul are expensive to repair or replace when damaged or stolen.
The problem with the trucking industry is you can have catastrophic losses. Still, while most trucking companies can expect rate increases this year, the amount will vary from one company to another depending on its individual record of accidents and injuries. During the past few years, rates were so low that some companies paid less attention to controlling losses. Now the day of reckoning has arrived.
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SOLUTIONS is a service of The McLaughlin Company and Creative Risk Management, Inc.—offering you timely and creative solutions to all your INSURANCE and RISK MANAGEMENT needs.
THE McLAUGHLIN COMPANY
CREATIVE RISK MANAGEMENT, INC.
1725 DeSales Street, NW
Washington DC 20036
Fax 202-857-8355 - 800-233-2258 - 202-293-5566
