INSURANCE AND RISK MANAGEMENT
2015 Insurance Market Outlook: Putting it Into Perspective
By Jeff Cavignac, Cavignac & Associates For many com-
panies, insurance
is one of their larg- est costs. When you add up premiums for property & casualty, workers’ compensa- tion, employee ben- efits,
life insurance
and other lines of coverage, it can often total 5 percent of revenues or more. It is critical to understand not only
how to manage these costs, but also how to forecast your costs as you look into your next fiscal year. The purpose of this article is to give you
some perspective on where the insurance industry is today and how the current fi- nancial situation and underwriting objec- tives will affect you in 2015.
Insurance Company Economics Insurance companies are in business
to accept risk in exchange for premiums. Like any other business, they want to make money and earn a fair return for their shareholders. Without a decent return, they will not be able to attract additional capital, and the insurance industry thrives on capital or surplus. Insurance companies make money in
two ways: 1)underwriting, and 2) invest- ments. An underwriting profit is earned when
losses plus expenses divided by premi- ums is less than 100 percent. This factor is called a combined ratio. If an insurance company has a combined ratio of 98 per- cent, it means they are making a 2 percent underwriting profit. If the ratio is 105 per- cent, it means they are losing 5 percent. Insurance companies also earn money
by investing the policyholders’ surplus and cash reserves they have set aside to pay future claims. It is not uncommon for an insurance company to have an underwrit- ing loss, but to make up for it with their investment income (especially when inter- est rates are high). From 2008 to 2012, the industry’s “re- turn on average net worth” was poor. This
www.AGC-CA.org
was attributable to a poor combined ratio and a low level of investment return. The year 2013 was a different story.
Unlike 2012, which was a bad “cat” year (losses from catastrophes… remember Hurricane Sandy?), 2013 was a light “cat” year, and the combined ratio reflects that. Underwriters
realize that 2013 was
somewhat of an aberration. They still feel they need about 5 percent rate increases on preferred accounts; however, they are not pushing the price increases as hard as they were at this time last year. So what should you expect to see in 2015?
Allied Lines This includes property, general liability,
auto and umbrella. Property and casualty rates have increased nearly 15 percent since 2011; however, they are still over 30 percent than they were in 2004. While most under- writers we talk to want an additional five points of rate or more, the positive results of 2013 are moderating those rate increases. On average, preferred accounts should be able to negotiate close to flat rate renewals and possibly even minor rate decreases.
Professional Liability – Also Known As Errors & Omissions Insurance The market for architects, engineers,
lawyers, CPAs, and other professionals remains competitive, with a large num- ber of companies competing for preferred accounts. Recognize that coverage, risk management, and claims handling dif- fer greatly between insurance companies. While you may be able to save money by going with a “bare bones” insurer, it is not recommended. Like the Allied lines, preferred profes-
sional liability risks should be able to ne- gotiate renewal terms plus or minus 5 per- cent from expiring rates. If you operate in what is considered a higher risk profession, such as geotechnical engineering, or if you have adverse loss experience, the market is much narrower.
Workers’ Compensation The good news is that workers’ com-
pensation results in California have im- proved significantly since 2011. This is due
in major part to average rate increases of about 35 percent since 2009. It should also be pointed out that average charged rates are still over 50 percent less than they were in 2003! The combined ratio has improved from the mid-140s experienced in 2009- 2011 to a projected 113 for 2013. Of course, the bad news is that the com-
bined ratio is 113, which means the indus- try still needs some additional rate to re- turn to profitability. While the Workers’ Compensation In-
surance Rating Bureau (WCIRB) has yet to publish its recommended loss costs, it is estimated it will be in the 7-8 percent range. Most of the insurance companies we work with have filed for or announced similar rate increases. While every insurer will publish its
own rates, on average, rates in California should increase 5-10 percent. National re- sults have been marginally better, but each state will vary.
Conclusion The insurance industry is in a better fi-
nancial position today than it was a year ago mainly due to the positive results in 2013 and the early positive predictions for 2014. The industry, however, has not forgot-
ten the mediocre returns experienced from 2008-2012. Most underwriters still want more rate; however, preferred risks should be able to negotiate flat renewal pricing or possibly modest rate decreases. The excep- tions are with workers’ compensation and executive risk. While the health of the insurance mar-
ket will directly affect what you pay for in- surance, a much more important element is your risk profile. When an underwriter considers your account, he or she will evaluate your overall operations, your HR practices, safety culture and overall safety practices, as well as your loss history. A positive risk profile will result in sub-
stantially better pricing than a poor risk profile. This underscores the importance of proactively managing your cost of risk. While you can’t control the insurance marketplace, you directly control your risk profile.
Jeff Cavignac, CPCU, ARM, RPLU, is
President and Principal of Cavignac & As- sociates, a leading commercial insurance brokerage firm. Visit them at
www.cavig-
nac.com.
Associated General Contractors of California 17
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