Scorching insurance rises, key article here
Business insurance rates on rise
TERRORISM, ECONOMY, ENRON ARE FACTORS
By Deborah Lohse
Mercury News
Phil Ullio's insurance broker sat him down at lunch at Fiorello's one day last month and said he had good news and bad news.
``The good news was that the pasta here is great,'' said Ullio, the owner of RoofCo roofing company in San Jose. ``The bad news was my insurance rate was going up about 300 percent.. I thought he was joking.''
He wasn't.
Companies across the nation are in the middle of an almost-perfect storm of rising prices for virtually every type of insurance available. And for that they can thank an array of forces: the terrorist attacks of Sept. 11, the Enron bankruptcy, the economic downturn and a general need by insurers to raise prices after years of underpricing to win business.
The price increases are so high that some companies, especially small businesses, may have to lay off workers -- as Ullio did. Others will pass the costs on to consumers, especially in industries now considered vulnerable to terrorists, such as sporting events, utilities and transportation.
For many experts, the simultaneous rise in so many types of insurance -- be it 10 percent or severalfold -- is a first in memory and may slow economic recovery. ``The breadth of this hard market may be unprecedented,'' said Robert Hartwig, chief economist of the Insurance Information Institute.
Last month, for the first time in years, small businesses surveyed by the National Federation of Independent Business listed insurance as their No. 1 business concern, along with taxes.
Ullio's new policy to insure against faulty work costs $1,500 more each month than last year, and now surpasses the rent on his Willow Glen office. He's also paying $2,800 every quarter for a worker's compensation policy, about 10 percent higher than last year, despite never having had to pay on a claim. And he's holding his breath to see how much of an increase he faces when he renews a so-called umbrella policy providing $1 million in coverage for five trucks.
Ullio said the roofing industry is too competitive to pass on his costs to many customers, so he recently laid off three of his eight workers.
The ill winds of the current marketplace come from many directions:
• Terrorists. Insurers expect to pay out more than $30 billion for property losses, workers compensation, liability and other claims stemming from the Sept. 11 terrorism attacks. That, in turn, has shrunk the money available from ``reinsurers'' that share the risks with front-line insurers in exchange for a cut of the premium. It has also freaked out insurers, who fear a new array of risks they want customers to pay for.
One place they are looking to get higher prices: property insurance. Insurers are paying far closer attention to the concentration of risk in any one location, and are setting higher prices, or denying coverage outright, for future losses caused by terrorist acts.
Take Stanford University, which insures $5 billion in property, including the medical center. The university's typical $2 million annual policy is likely to cost as much as $6 million come renewal time in September, said the director of risk management, Jeffrey Seilbach, and a liability policy is apt to rise 66 percent to $1 million. Seilbach said he's looking into having Stanford self-insure some risks.
Likewise, the school's worker's compensation coverage for 15,000 employees is likely to jump to $10 million a year, up from $6 million. And the medical malpractice policy covering two hospitals for mega-losses -- which Stanford has never tapped -- will probably rise about 25 percent to $1.25 million in premiums.
``We're really paying for other people's sins,'' Seilbach said.
• Enron. The Enron bankruptcy woke insurers up to the risks in a sleepy type of insurance known as surety, which insures against a variety of risks like a construction project not finishing or an oil-trading deal falling through. Many insurers in recent years took extra risks by collecting less in premiums than they might face in claims, figuring they'd win market share and make up any losses with gains in the stock and bond markets.
A string of construction failures and exposure to Enron, which had surety insurance for an estimated $2.4 billion of transactions, caused many insurers to begin restricting their offerings.
Kmart cited an inability to get surety coverage for its self-funded workers compensation insurance program as one reason it filed for bankruptcy.
The new stinginess is also hurting Palo Alto-based PayPal, which is obliged to get surety coverage in case the money-transfer company disappears, so customers will get their money back. In the past, PayPal might have gotten such coverage unsecured, or by putting up a small percentage of the policies as collateral.
Now, the company must pledge enough cash to cover the full value of the policies -- $6.6 million -- required in many states, said Sal Giambanco, PayPal's vice president of administration.
• Lawsuits. A recent spate of costly lawsuits is causing a spike in the price of a variety of liability insurance coverages, including coverage for corporate directors and officers who get sued by unhappy shareholders.
``Nearly every day brings new revelations of aggressive accounting practices leading to restatements, which inevitably lead to shareholder suits,'' said economist Hartwig.
Ullio's industry -- home construction -- also has experienced a spate of big-money lawsuits alleging construction defects, with some consumers claiming that the recent building boom caused builders to cut corners. That's why his previous insurer didn't want to even offer a price quote for the liability coverage.
``When people sue, they sue everybody who put the shovel in the dirt all the way to the person who put the last flower in,'' said Patricia Kennedy, co-owner of Kennedy Insurance Agency in San Jose.
Insurers also blame a tripling of medical malpractice awards for a recent spike in malpractice insurance costs.
• Mispricing. Even before Enron or Sept. 11, insurers were nursing a hangover from a decade of price wars.
For 2001, insurers paid $1.16 in claims and expenses for every $1.00 they had collected in premiums, with the disparity far worse in certain types of insurance. As a result, insurers recoiled from many markets where they had been most reckless, especially worker's compensation and certain auto lines.
Brokers report that it's harder to find an insurer for large-dollar policies known as ``umbrella'' coverage; contractors often cannot get surety coverage unless they've got $50 million in net worth; and property insurers want five times more data before they'll write a policy these days, said Ron Dial, a managing director at Willis insurance brokers in San Francisco.
Then there's worker's compensation insurance, where each state generally sets benefit and rate levels. In 1995, California allowed insurers to charge whatever they wanted. In a race for market share, insurers slashed prices. The falling stock market and rising health-care costs caused a slew of insurers to go bankrupt or pull out of the state.
To top it off, employers in California now have additional state-mandated benefits they must pay to injured workers, which will probably further add to the cost of such insurance.
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