Articles

It seems that everywhere we turn we hear "as a result of September 11" or "since the events of 9/11" ... and the rest of the sentence is rarely positive. Increased stress, decreased consumer confidence, decreased airline service, and so on. In the last few weeks there has been a decline in the reminders, but it will be years (if ever) before we put it behind us.

The statement that "everything has changed" definitely applies to the insurance industry. It is something that hasn’t made the news in great detail – but it can and will have a tremendous impact on all of us. September 11th is a big factor … but there are also other factors that have led to major adjustments in coverage and rates.

We don’t know exactly what the impact on the insurance industry will be, but from the information we are getting from our insurance companies, newspaper articles, and insurance journals, we’re afraid it won’t be pretty. We have already heard rumours of rate increases ranging from 10 to 40% in the next year, and can only hope this is the beginning and the end of it. We don’t want to be alarmist - but we also want to make sure you are given the forewarning you deserve.

I have pulled together some information from a number of sources and hope they give you some perspective on what is going on - although we will all have to wait and see what the true end results are. I can only stress that this is based on the information I have read to date, and there are updates coming all the time.

- One factor is the terrorist attack of September 11, 2001. -

"How can this be the largest workers compensation loss in history (by multiples), the most expensive aviation disaster in history (by multiples), one of the largest property losses in history, the most expensive business interruption in history (by multiples), the largest life insurance catastrophic loss in history (by multiples), and one of the largest potential liability claims in history". - report from Morgan Stanley

"The present thinking is that the losses to the insurance market [from September 11] will range from US$40 billion to US$200 billion" the consultants (Milliman) say. This extreme figure takes into account life insurance, which based on the large number of high net worth individuals who lost their lives during the WTC tragic event could well boost the insured cost to astronomical levels." – Sean van Zeyl, Canadian Underwriter Magazine

This loss is far in excess of what insurers have planned for - or likely even imagined possible.

With the claim settlements that are currently being made, and will be made in the future, the companies must adjust their premiums to recover and to continue to run viable businesses. Rate increases will not be equal across the board, and not all companies will announce their increases at the same time – but they WILL happen everywhere. Expect to see them start as early as January 2002. Companies and market segments that have been harder hit will likely show greater increases.

- The second factor involves reinsurance companies and how September 11th effected them. -

Every insurance company in the world will likely be effected to some extent, even if they do not pay out on a single claim resulting from September 11th. This may sound strange ... but the reason for this is because of reinsurance. The principle of insurance is to accept the risk you can handle, and pass on the risk of loss above that to an insurance company. Insurance companies also utilize the same principle, and they get insurance to protect them from large losses by going to reinsurance companies. For example, if they insure a $5m building, they may cover the first $1m of a loss themselves, but have everything above that covered by a reinsurance company. And even though there are hundreds (or thousands) of insurance companies, they all deal with the same reinsurance companies. This means that individual companies may be hit with losses capped at $115 million, but the reinsurers pick up amounts that are multiples of each company’s limits ... and their grand totals will likely be astronomical.

If the reinsurers have taken large losses (like the billion dollar estimates of 9/11) their rates for reinsurance will go up, and thus be passed on to the individual insurance companies. There are fewer than 50 reinsurers … and it is unlikely that any of them will be untouched. The insurance companies pay premiums to the reinsurers, and their premiums are going up!

- The third factor is decreased profitability in the insurance market for a number of years. -

Over the past number of years, there has been an astronomical increase in the number and severity of claims (especially liability and bodily injury). The increase in bodily injury claims from automobile accidents has more than doubled in the last 7 years. This has led to higher litigation costs and increased payments, and the industry has been slow to respond with rate increases to compensate, hoping for a turnaround that has not happened.

"Every year since 1978 the Canadian insurance industry has paid out more in claims and expenses than it has collected in premiums, therefore, operating at a deficit." – Royal & Sun Alliance brochure.

There has also been a severe decrease in investment returns (from 12 – 14% in 1995/1996 to around 3% in June 2001), which is where the insurance companies usually made up the shortfall, and earned the profits to pay to their shareholders. (Most companies operate on a principle that if the income from premium basically equals the payments on claims they are happy, because they make more money from investing their day to day balances).

The adjustments by the companies to compensate for increasing claims costs and low investment returns had already started prior to September 11th … and this has just been compounded by the terrorist attack.

In addition to the rate increases, we know companies will be "tightening up" on their rules. Even before September 11th, many insurance companies were evaluating their procedures and rates to make sure they remained profitable … the market was "hardening". This means the guidelines we get from our insurers on what type of business they will write at a certain premium, what information they need from their client, and what exceptions they will make to their rules has gotten tougher. We have already seen some companies turn down clients with less than perfect records whom they would have written 6 months ago as "accommodation", which means we have to find alternatives with other companies (obviously, and unfortunately, at a higher cost). Even clients with perfect records are being hit by the increases.

We hope this gives you an update on what we have heard. We try to always maintain open communication with our clients, and want to make sure you have some more background on this situation. We also believe it is easier to give you the information to review at your leisure instead of seeming to be making excuses or "justifying" the rate increase when you receive a higher bill. (Remember, our own insurance premiums are going up too, so we know how you feel about it!). We don’t know for sure that your next renewal will be impacted - and sincerely hope we can ride this out without drastic increases - but we wanted to give you this information now. We know it will be difficult, if not impossible, to give each or you a detailed explanation in person – and hope this is an acceptable substitute. We are always willing to spend some extra time with you if you still have questions, and will update you further as we hear more.

The Team at Harmony Insurance Ltd.