P-C Prices Still Falling For Start Of 2009, With No Sharp Turnaround Expected

While there has been much talk about how the commercial insurance market is finally poised to harden, there is little evidence of any turnaround in the latest “Market Barometer” survey, which indicated that rates for January declined an average of 9 percent—the same level as the in last two months of 2008.

While the composite rate index level seen in the latest pricing barometer signals that the depth of price-cutting may have bottomed out, the market as a whole has certainly not reversed direction, observed Richard Kerr, chief executive officer of MarketScout, the Dallas-based electronic insurance exchange that puts together the monthly survey.

“Insurance executives are forecasting and closely monitoring the prospects for much needed rate increases in 2009,” he noted. But Mr. Kerr said the recession presents a daunting challenge, with the health of the U.S. and world economy playing a large role in the fortunes of insurance companies and brokers.

“Lower payrolls and receipts are resulting in lower premiums and severe pressure on expense rates,” he said. “Insurers and brokers are faced with diminished premium bases before they even consider the terms of renewal or rates.”

Mr. Kerr noted that if a firm’s exposure base is down 20 percent, and it renews 90 percent of its customers, it only captures a true premium renewal rate of 72 percent.

“The resulting lower retention puts incredible pressure on new business initiatives in order to maintain premium volume, all while insureds are trying to save even greater amounts of money across the board,” he said.

As a result, he predicted, “more insureds will take bids in 2009, and insurance companies will be forced to participate in the process. While we expect upward movement in prices, we don’t expect dramatic swings in the near term.”

By coverage class, MarketScout reported that January rates declined on average by:

• 10 percent for businessowners policies.

• 9 percent for commercial property and general liability.

• 8 percent for commercial auto and crime.

• 7 percent for business interruption, umbrella/excess, workers’ compensation, professional liability, employment practices liability and fiduciary liability.

• 6 percent for inland marine and surety.

• 5 percent for directors and officers.

Reductions by account size were found to be sharpest for large accounts (from $250,001 to $1 million in premiums), which were down 10 percent. Medium-size accounts (from $25,001 to $250,000) were down 9 percent, while small accounts were down 8 percent.

By industry class, MarketScout found manufacturing and service industries to be down 10 percent; contracting, 9 percent; habitation, 8 percent; public entities, 7 percent; and transportation and energy, 5 percent.

Insurance Industry Advises Small Businesses Not to Skimp on Coverage

Insurance coverage is an expense that many small business owners might be tempted to cut back on or even forgo as they try to cut costs during the recession. They're making a bet that they won't need the coverage, but it's a bet they could lose.

Spring floods aren't too far off in the future, to be followed inevitably by tornadoes and the hurricane season. And there are the more mundane disasters that can also threaten a business -- fire, theft, power outages, even someone being injured on the premises.

Loretta Worters, vice president for communications of the Insurance Information Institute, a New York-based trade group, said insurance may seem like a lower financial priority for some small business owners right now.

"They're facing all these challenges today: rents are rising, financing hard to get,'' she said. "Things are daunting to them, but one thing they have to think of is the whole issue of being underinsured.''

An underinsured business doesn't have adequate coverage for disasters or incidents like fires, thefts or accidents. But even companies that aren't cutting back their coverage might be unwittingly uninsured. Worters noted that a business might have made improvements to its building or bought new equipment, and if an insurance policy isn't adjusted upward, payments could fall well short of the replacement costs.

At the same time, she noted, real estate values have fallen and so it might make sense for some companies to reduce coverage.

Still, an owner uneasy in this economy might decide to play the odds and either cancel a policy or cut it back too far. Or, make a mistake out of ignorance, by buying insurance to cover damage from forces such as wind, rain, hail and fire, and not checking to see what isn't covered. For example, damage from flooding or earthquakes isn't covered in such policies. That coverage has to be purchased separately.

Some owners might also decide against business interruption insurance, which is available in what's known as a business owner's policy, or BOP, which also includes property coverage. Business interruption insurance makes the coverage more expensive, but it can mean a company's survival when it can't operate because of a disaster; this type of policy covers a company's expenses and lost profits.

Many workers who have been downsized over the last year have decided to start businesses out of their homes, and many are likely to be underinsured because they mistakenly assume their homeowners coverage will protect them. The same can apply in the case of a vehicle used for both business and personal purposes.

Worters said some homeowners or standard auto policies may include a small amount of business coverage. For example, she said, someone who does freelance writing at home might not need an additional policy. But, the important thing is to check -- nobody wants to find out there is no coverage when a client coming to visit, trips over the family dog and falls.

And, Worters said, the additional coverage may come in the relatively inexpensive form of an endorsement to your homeowners' policy.

Owners of businesses in certain industries should also be aware of policies tailored to their line of work -- for example, restaurant owners might want to take out policies to cover food spoilage.

The Insurance Information Institute has information on its site, www.iii.org/individuals/business. It explains different kinds of general business coverage such as businessowners' policies and business interruption insurance. It also has sections describing the insurance needed by specific industries such as retailing, manufacturing, farming, food service and lodging.

The National Association of Insurance Commissioners, which represents state insurance officials, also has a Web site, called Insure U for Small Business at www.insureuonline.org/smallbusiness.

Information about flood insurance can be found at the federal Web site www.floodsmart.gov.

Business Income's Non-Coinsurance Options

Business Income Agreed Value

Business income agreed value suspends the coinsurance condition for 12 months. Qualifying for agreed value protection still requires the insured to complete the Business Income Report/Worksheet (CP 15 15) at the beginning of the policy period and every year thereafter. If an updated worksheet is not completed annually, the policy reverts back to a coinsurance form with all its applicable penalties. So this is not the best option if the insured and/or the agent are trying to avoid the worksheet.

"Agreed value" signifies that the insured and the underwriter agree up front on the amount of "insurable" business income subject to loss. The insured agrees to carry that pre-determined amount of coverage; in return the underwriter agrees to pay the entire business income loss up to that limit without the application or consideration of coinsurance or the actual business income (if the insured underestimated).

To clarify, the insured is not required to carry or limited to the 12-month business income amount calculated using the worksheet. The amount is and should be based on the estimated "period of restoration" and the percentage of a year that period represents. Calculating the "period of restoration" and ultimately the coinsurance is still necessary and was detailed in several earlier posts. All ISO-published coinsurance percentages are available for use with the agreed value option (50, 60, 70, 80, 90, 100 and 125%).

For an easy example, assume the insured estimated that a full year is required to return to "operational capability" and selects 100 percent coinsurance (estimated "period of restoration" / 12 = maximum coinsurance percentage) to account for the estimated time. Should the insured choose the business income agreed value option with 100 percent coinsurance, they are now committed to purchasing the full 12 month business income estimated amount ("J.1."). If the insured purchases any amount less than the required amount calculated, they are subject to a loss payment penalty.

The agreed value penalty is calculated exactly like the coinsurance penalty except that it has nothing to do a miscalculation of the actual business income during the coverage period. This penalty is assessed because the insured failed to purchase the amount of coverage they and the underwriter agreed would and should be in place. In essence, the insured is penalized for not meeting contractual requirements, whereas the traditional coinsurance penalty is assessed to assure the insured carries proper coverage and that the insured collects ample premium for the exposure.

An example of the difference between business income agreed value and traditional coinsurance is attached. For sake of the example, assume this insured is a manufacturing operation that underestimated the actual business income earned during the coverage period ("period of restoration") when completing the CP 15 15. All the necessary information for the calculation and comparison is found in the attachment.

Without the agreed value option the insured could have been out-of-pocket more than $61,000. How much greater would the uninsured amount have been had this been a much larger manufacturing entity? Hundreds of thousands of dollars could be left for the insured to pay.

Business income agreed value is a useful coinsurance-suspending option. Since the insured and the underwriter agree to the exposure and coverage amounts in advance, there is no question whether there is enough coverage at the time of the loss. Only a total shutdown exceeding the estimated maximum period of restoration will show the effects of any underestimation of the business income amount.

Activating this option increases the business income premium by about 10 percent compared to the traditional coinsurance coverage. However, business income agreed value has the lowest rate per $100 of protection when compared to the two remaining non-coinsurance options.

Monthly Limit of indemnity

This option to traditional coinsurance allows the insured to completely avoid coinsurance and sidestep the requirement of completing a business income report/worksheet (although that should no longer be an issue). There is no real up-front calculation associated with this option; the only calculation done is at the time of the loss, to decipher the maximum limit available during any one 30-day period.

Two decisions are required with this option: 1) the limit of coverage; and 2) the "monthly limit of indemnity" coverage fraction. No "formal" income calculations are done, so the limit is little more than a guess made by the insured. The second decision requires the insured to choose from among the three available "monthly limit" fractions: one-third (1/3), one-fourth (1/4) and one-sixth (1/6).

The monthly-limit fraction serves to cap the amount of coverage available in any 30-day period. The chosen amount of coverage is multiplied by the fraction to arrive at the maximum pay out during any 30-day period. For instance, if the insured purchases $300,000 of coverage, the maximum amount available in any 30-day period is:• 1/3 monthly limit = $100,000 maximum available for each 30 day period;• 1/4 monthly limit = $75,000 maximum available for each 30-day period; and• 1/6 monthly limit = $50,000 maximum available for each 30 day period.

One myth surrounding this option is the function of the denominator in claims settlement and payout. Some believe and teach that the denominator (the bottom number) limits the number of months the insured will get paid. That is, if the insured chooses 1/3 monthly limit of indemnity they will only be paid for three months of lost business income. That is fully and completely false, unless the limits are completely used in the first three months.

The denominator serves NO OTHER purpose than to limit the amount the insured can receive in any one 30 day period. Continuing with the above example, the insured choosing 1/3 monthly limit has up to $100,000 available for any 30-day period during the period of restoration." Business income loss payments will continue until the insured uses up the full $300,000 or returns to full "operational capability," whichever comes first. If it takes six months to use up the entire $300,000, that's how long the policy will pay.

Monthly limit of indemnity, contrary to its name, is actually a "non-indemnity" option; meaning that the amount of coverage has no real or known relationship to the insured's business income exposure or estimated "period of restoration." As such, the insured is entitled to receive the entire amount regardless of how long it takes. Again, the only two limitations are: 1) the monthly limit (as decided by the fraction); and 2) a return to "operational capability" before the limits are completely used.

If coverage is provided using the CP 00 30 (Business Income (and Extra Expense) Coverage Form), it is important to remember that the fraction does not apply to the extra expense coverage. However, the amount needed to cover any extra expense must be added to the business income limit purchased.

For example, if the insured wants $300,000 business income (BI) coverage and $120,000 extra expense (EE) coverage, he should purchase $420,000 in total protection. The maximum payout is limited to $420,000, but the amount available for extra expense in any one month is not limited by the fractional amount. If the 30-day BI amount exceeds the fractional limit, the entire extra expense loss is still paid. This continues until the total of both BI and EE losses reaches the limit purchased.

Click here for an example of monthly limit of indemnity loss settlement with extra expense coverage (using the CP 00 30). The example assumes $420,000 and 1/6 monthly limit of indemnity. Notice that the payout goes until the limit is used.

Maximum Period of Indemnity

The last and simplest of the non-coinsurance options, the maximum period of indemnity limits business income and extra expense payments to 120 days or until the limit is spent whichever occurs first. Like the monthly limit of indemnity, the amount of business income is little more than a guess.

This is a good option only if there is absolutely no question that the insured can return to operational capability within 120 days. Insureds that qualify might include those that:• Do not require any specialized facilities to operate and can run the business from practically any location. These insureds do not own the building and has quick access to leasable space; or• Can operate using other locations to absorb the production lost at the damaged facility (this is probably rare).

Maximum period of indemnity is a non-indemnity option. Like the monthly limit of indemnity option, the limit of coverage is not based on the actual exposure. Unlike the monthly limit option, coverage is limited to a specific number of days. If the insured does not use the entire limit during the 120 day period, the insured is simply out of luck (to some extent as they still had their business income exposure paid during the 120 days).

Of the three non-coinsurance options, this one carries the highest rate. Of course, the higher rate is somewhat offset by the lower limits likely purchased. This may not be the best option for the insured.

Finishing Up!

With the detailed discussion of the CP 15 15 in earlier posts, looking for a non-coinsurance option out of lack of understanding may not be necessary. However, if an insured is unsure of the amount of expected business income or is unwilling to provide the required accounting data, a non-coinsurance option may be the only way to cover the business income exposure.

Insureds need to understand the options, the costs involved and the limitations on coverage. The paragraphs above have provided a quick overview of the three options available. The next post details extra expense protection and its various coverage options.

South Carolina Celebrates Licensing 200 Captive Insurers Since 2000

The South Carolina Department of Insurance is celebrating issuing its the 200th captive insurance company license.

State Insurance Director Scott H. Richardson presented the license to Hardin Construction Co. of Atlanta, Georgia at a special dinner ceremony in Charleston sponsoired by insurance brokers, captive management consultants and law firms.

"This represents the hard work and dedication of the captive insurance community in South Carolina. We are proud of our captive program and look forward to seeing it continue to flourish," Richardson said. More than 100 invited guests attended the dinner, according to officials.

The state began licensing captive insurance companies in 2000 and has been one of the fastest growing domiciles for captives in the nation

Beazley Acquiring The Hartford's Surplus Lines Insurer, First State

London-based insurer and reinsurer Beazley Group is acquiring Boston-based First State Management Group, an underwriting manager specializing in excess and surplus lines commercial property insurance for $35.4 million in cash.

First State is a subsidiary of The Hartford Financial Service Group and is led by president and chief operating officer Judy Patterson.

The acquisition will significantly increase Beazley's presence as an insurer of mid-sized U.S. commercial property business that does not normally come to Lloyd's. Officials said that First State plans to underwrite around $150 million of gross premium for 2009, balancing the specialty lines business -- professional and management liability business-- that Beazley has been writing locally in the U.S. since 2005.

The Hartford said the move is part of its strategy of moving away from excess and surplus lines business and was not triggered by recent troubles with its life insurance operations.

"This is an agreement we have been working on for many months. We are entering into this transaction to reduce our exposure to excess and surplus lines property insurance, which is not core to our business," said Gary Thompson, executive vice president of The Hartford's property and casualty middle market and specialty lines insurance.

Thompson said First State's livestock and nursing home programs will transition directly to The Hartford.

As of Nov. 30, 2008, First State had gross assets of $10.6 million. First State does not report on its own profit as a standalone entity but instead reports as part of a division of the Hartford Group.

Beazley said it plans to raise additional equity capital through a proposed rights issue and placing, supporting the acquisition of First State and growth at Lloyd's