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Insurance Experts: Big Rate Hikes in 2002
By: Andy Gotlieb Staff Writer, Philadelphia Business Journal
Businesses large and small likely will be clobbered by a round of steep
increases in property and casualty insurance resulting from the Sept.
11 attacks.
Three area property and casualty insurance companies predicted premium
increases anywhere from 12 percent to 30 percent, while a Wharton School
professor said 50 percent rate hikes aren't out of the question.
After more than a decade of what insurers call a "soft" market
-- where market conditions and competition prevented insurers from charging
what they consider an appropriate amount in light of their costs -- conditions
had begun to change in recent years. A "hard" market characterized
by a double-digit rise in premiums was already developing.
Then came Sept. 11.
"If anyone was wavering (on increasing rates), this pushed them over
the edge," said Jon S. Saltzman, president and CEO of Penn-America
Group Inc. of Hatboro, a provider of specialty property and casualty insurance
covering clients such as bars, restaurants and small businesses.
Saltzman said increases likely will stem from increased costs for reinsurers
-- companies that help primary insurance carriers shoulder some of the
risk associated with a policy.
Trade publication National Underwriter said reinsurer Berkshire Hathaway
could be on the hook for $2.2 billion, while Lloyd's of London could be
out $1.9 billion. The loss is estimated at $1.95 billion for Munich Re
and $1.65 billion for Swiss Re.
Bermuda-based ACE Ltd., which has its U.S. headquarters in Philadelphia,
estimated a $550 million loss, although National Underwriter pins it at
$786 million.
Dazed reinsurers will try to recoup losses by raising rates for primary
insurers, Saltzman said.
"I'm literally talking to reinsurers who don't sound like themselves,"
he said.
Saltzman estimated Penn-America rates will climb 12 percent to 25 percent,
depending upon the line; property lines are more likely to be affected
than casualty lines. The company reported no exposure in the Lower Manhattan
devastation.Saltzman noted that Penn-America raised its rates roughly
10 percent last year, before the market started to harden. It did so to
improve profitability, but got "nailed" by customers who defected
as a result.
Philadelphia Consolidated Holding Corp. of Bala Cynwyd, parent company
for the Philadelphia Insurance Cos., expects across-the-board rate increases
of 15 percent to 30 percent, founder, Chairman and CEO James J. Maguire
said.
Worse, reinsurers likely will raise rates 50 percent to 100 percent, Maguire
predicted.
He noted that all the company's reinsurers have sent cancellation notices
to Philadelphia Insurance in preparation for newer, more expensive coverage.
"I will guess their recapture period (the length of time it will
take them to make up for losses) will be a three- to five-year period,"
he said.
Harleysville Group President, Chairman and CEO Walter Bateman expects
reinsurers to fork out between $30 billion to $70 billion when all the
bills come due. His company has said its losses aren't expected to exceed
$3.6 million.
"The reinsurance industry just hasn't priced its business to handle
this kind of disaster," he said, anticipating other changes aside
from price increases. "Terrorism is a coverage that gets stripped
out of the '02 renewals."
Bateman said it's difficult to predict how much rates will climb at Harleysville,
but indicated that industry analysts are saying between 15 percent and
20 percent.
Harleysville Group got a bit luckier than some primary insurers, since
its reinsurance treaties won't be renewed until July 1, Bateman said.
Reinsurance typically renews on Jan. 1 and July 1.
Bateman indicated that the Sept. 11 fallout will continue.
"I think what we've seen thus far is fairly routine," he said.
"I think the surprises are yet to come."
Business interruption will become an increasingly important topic, Bateman
said. There's some debate over whether the World Trade Center attacks
count as one or two events. And there could be plenty of future workers'
compensation cases involving survivors who inhaled the thick dust that
enveloped the area as the towers collapsed.
Maguire already is learning that. His company originally expected minimal
impact, but upped the total to $2 million.
Philadelphia Insurance covers 13 health clubs in Lower Manhattan that
remain closed. Business interruption policies will provide those clubs
some relief. The company also has a workers' compensation death claim
from a client on one of the hijacked flights. And on several buildings
in the target area, air conditioning systems will need a thorough scrubbing
at $25,000 to $35,000 a pop.
Jerry Rosenbloom, a professor of insurance and risk management at the
University of Pennsylvania's Wharton School, said perhaps the biggest
issue will be uncertainly -- the question of what else might be coming.
"I guess the whole fear nobody knows is what's likely to happen,"
he said. "Is this like a hurricane that comes once ... or is this
something that will happen regularly?"
Rosenbloom, who predicted property and casualty rates might rise as much
as 50 percent in some instances, suggested insurers may start building
in bigger margins in policies to help cover worst-case scenarios.
Rosenbloom said the property and casualty increases experienced by businesses
may also filter down to consumers.
last updated: October 24, 2001
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