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Insurance Update — U.S. Industry
Is Healthier Than in Past Years
Despite some ongoing coverage restrictions,
policies for commercial contractors should see more reductions
in premiums as the insurance marketplace stabilizes
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Jeff
Cavignac
PRESIDENT
Jeff Cavignac is president of
Cavignac & Associates, a San Diego-based commercial
insurance brokerage firm, which focuses on helping its
clients reduce their total cost of risk.
www.cavignac.com |
Most of the experts who have studied
the insurance industry in 2006 have issued caveats to their
analyses. That's because the full impact of Hurricanes Katrina
and Rita-the largest insured natural disasters in the U.S.
history-remains to be seen.
Other than the lingering questions about
the ultimate impact of the Gulf Coast cleanup, the U.S. insurance
industry is actually quite healthy. Most insurance companies
are still maintaining a high degree of underwriting discipline,
rewarding firms with good loss histories, as well as solid
business and safety practices. It is anticipated that this
market will remain competitive at least through 2006 and possibly
into 2007.
On a composite basis, commercial contractors
have seen rates decrease approximately 7% over the past year.
Residential construction is another story. Rates have held
firm, but decreases are rare. Experts anticipate the downward
trend in rates will continue over the next 12 months, mainly
because four or five quality insurance companies are now interested
in insuring commercial constructors.
At the same time, coverage restrictions
continue. In addition to exclusions in the standard coverage
form, it is not uncommon to see additional exclusions for
prior damage, multifamily housing, subsidence, mold, silica,
EIFS-and the list goes on. Carefully evaluate each prospective
program to understand the coverage being offered.
Owners in Control
Almost all general liability policies in the market today
for developers and contractors contain multifamily housing
exclusions. The only way to insure these projects is with
an Owner-Controlled Insurance Program policy, also known as
"wrap-ups."
The market for OCIPs has improved over the past year, but
they are still extremely expensive. Rates on these programs
generally are in the 1.5-2% of sales cost range for a $2-million
limit and subject to minimum premiums of about half the limit
offered. In other words, the minimum premium for a $2-million
policy would be approximately $1 million. At a rate of 2%,
business owners would need to generate $50 million in sales
to hit the minimum premium.
Recently, a few new underwriters have entered the OCIP field.
Some are offering lower minimum premiums on smaller projects.
In addition, some underwriters are now allowing selected developers
to combine several projects under one policy, which lowers
the per-unit cost for the insurance.
Safety Dividends
The workers compensation insurance market in California continues
to improve, and rates have come down significantly. Several
years ago, many clients had no other option than to use the
State Compensation Insurance Fund. Today, most clients have
alternatives. A lot of this has to do with lower underlying
losses, which has attracted more competition to the industry.
But why have losses decreased? Losses have declined, mainly
because of legislation and the focus by employers on safety
and loss prevention, with improved results. This attracts
more insurance firms to the market, which has had a downward
impact on pricing.
Businesses that have renewed within the first six months
of 2006 should have seen relatively significant rate decreases.
It is possible that these could be in the 15-to-25% range.
Clients renewing in the second half of 2006 also should receive
rate decreases, but to a lesser degree. Remember, though,
that every insurance company uses its own rates, and every
account is subject to the insurance company's experience modification,
as well as specific debits and credits the underwriter may
apply.
The only way to accurately forecast workers' compensation
insurance costs is to sit down with your broker, work though
a projected experience modification, and discuss with your
underwriter what rates will be applicable for the company's
specific classifications.
Workers' compensation insurance is more of a financing tool
than an insurance product. Ultimately, through the use of
experience modification, employers will end up paying their
own claims. Because of this, the only way to control premiums
in the long run is to manage underlying costs. Owners can
employ many strategies in the areas of audit, experience modification,
injury prevention and injury management to effectively manage
their workers' compensation costs.
A Buyers' Market?
The current insurance market could be called a buyers' market.
The industry is earning a profit and making a decent return
on equity, has adequate surplus and ample competition. Assuming
a firm has a decent loss history and is otherwise acceptable
from an underwriter's perspective, it should see flat to modestly
decreasing rates (0 to 10%) on its renewal premiums. In the
case of workers' compensation insurance policies, these decreases
in premiums could be even greater.
Recognize, though, that every account is different. Business
owners should sit down with their insurance brokers and walk
though each line of coverage to arrive at a reasonable cost
estimate.
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