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Virginia insurance brokers
see landscape changing since 9/11
Related
story: List
of Virginia insurance brokers
Although the terrorist attacks
of September 11, 2001, occurred more than a year and
a half ago, the aftershock is still reverberating through
the commercial insurance industry. As we reported in
our December 2002 issue, the overall market is rapidly
changing as insurers consolidate to limit their exposure
and the re-insurance market contracts as companies merge
or go out of business altogether. We talked with several
commercial insurance brokers from different regions
of Virginia and asked them to comment on the state of
the market since 9/11. Here are their responses:
What
is the single biggest change you have seen in the market
since 9/11?
Walter Smith
VP, Area Manager
BB&T - DeJarnette & Paul, Richmond
The biggest change I have seen is the “hardening”
of the re-insurance market, which has directly affected
capacity and pricing. That is to say, the re-insurers
were already tightening their terms with primary carriers
prior to 9/11 because of several consecutive years of
poor underwriting results, but when that event took
place, there was an immediate and much more severe contraction
in their terms with primary carriers. In the past 20
months re-insurers have further restricted the lines
of coverage they will support. And the support they
do provide comes at a drastically increased price, often
many times higher than premiums prior to 9/11. The bottom
line — much higher prices for the end-user as the
primary carriers have to pass the bulk of this cost
through to the consumer, be it for individual or business
coverage.
John Love
Principal
AH&T Technology Brokers, Leesburg
The size of the financial loss (insured losses) of 9/11,
was so significant that it reduced the capital surplus
of the U.S. insurance industry by approximately 10 percent
in a day. This, coupled with the other capital losses
insurers are reporting on their investment portfolio,
sparked an immediate tightening of underwriting standards,
terms and conditions. For the most part, front-line
underwriters have attempted to be fair and reasonable
with their renewal quotes for their insured clients,
but their authority has been restricted and more decisions
are made at the home office level as far as minimum
price increases, and restricted/prohibited classes of
business.
Jim Kitchin
President
Hilb, Rogal and Hamilton Company of Virginia, Inc.,
Glen Allen
Sept. 11, which was horrific in and of itself, really
put a public point on what had been happening in the
industry for some time. 9/11 cost the industry about
$40 billion. The equity markets have lost ground for
three years. Liability loss costs are up 4% to 5% over
previous levels. Additions to insurance company reserves
for long-term losses such as asbestos, medical malpractice
and now mold reached $9 billion in 2002 and will probably
climb in 2003. Despite dramatic additions in new capital,
surplus continues to drop. And the Enron/WorldCom situations
have made corporate governance the watchword of today.
Dorothy Dembowski
Vice President
Marsh USA, Norfolk
Since Sept. 11, 2001, the largest change in the insurance
marketplace has been the shrinkage of capacity coupled
with the return of intense underwriting of business.
Immediately after 9/11, almost all of the major insurance
and re-insurance companies put a hold on writing new
business while they worked to quantify the size of their
respective losses stemming from the occurrences of 9/11.
Once released from their “hold,”
insurance companies began scrutinizing new and renewal
submissions demanding detailed comprehensive information
on portfolio holdings, even the aggregation of workers
in each location. This was borne out of the change in
everyone’s perception about what a Probable or
Possible Maximum Loss (PML) might be at a corporate
headquarters, an office building, or collection of office
buildings. Prior to 9/11/01, the PML on the World Trade
Center was seven floors of destruction, not seven buildings.
Joel Nichols
Senior Executive Vice President
Scott Insurance, Roanoke
Sept. 11 produced an overall lack of competition among
the remaining insurance companies. With carriers getting
large rate increases to fill their coffers, they don’t
need to chase new business. It’s expensive and
time consuming for them when they can get 25% to 100%
increases from their current client base. I also see
a number of previously top-rated carriers in trouble.
They’re going out of business and being bought
up by competitors, which creates less competition due
to the lack of players
R.C. Moore III
Owner
Tabb Brockenbrough & Ragland LLC, Richmond
Clearly, the most significant changes for the industry
have been the return to traditional risks selection
and a pricing structure to assure individual account
profitability. This process was largely ignored for
the last 10 years while carriers sought out greater
revenue share to invest in an overheated investment
market.
Today, this is causing market
disruption both in availability and pricing. Medical
malpractice in the professional liability sector is
showing strains from much more stringent underwriting
and carrier withdrawal based on an unprofitable outlook.
Directors and Officers coverage is impacted by both
high-profile corruption and fraud cases as well as corporate
governing regulations that will focus on corporate boardrooms.
Thomas R. Brown
President
The Rutherfoord Cos., Richmond
The insurance market was hardening prior to 9-11 but
obviously the events that day exacerbated the conditions.
Insurance has always been a cyclical business with traditional
3 to 4 year cycles. The last soft market started turning
in 1988 and continued to soften until late 1999 or early
2000. Obviously this was a much longer cycle than normal
with the extended price erosion finally catching up
to the insurers. In addition to the competitive market,
insurers were confronted with continuing asbestos claims
which further eroded their performance.
Do you
see any positive trends in the commercial
insurance marketplace?
Jim Kitchin: Despite the
“gloom” of recent market conditions, the insurance
industry is very vibrant and viable and the discipline
imposed on operations will bode extremely well for the
future. A return to underwriting profits will foster
carrier stability and a renewed effort toward loss and
risk control both of which will help abate the steep
climb in premiums and lack of capacity.
John Love: This is my 14th
year in the insurance business, which is
over 300 years old so I am only seeing a small slice
of the historic trend. However, I felt that underwriting
was getting sloppy in the 1997-2000 timeframe and insured
clients were not being forced to adhere to better loss-control
protocols. Since insurance is a risk transfer business,
there is value in the underwriters essentially requiring
customers to be cautious. More attention to safety and
security in developing your product or service ultimately
leads to more profitable business operations. Now, with
the hard market, underwriters are in essence forcing
businesses to improve their risk control efforts and
I think that is a healthy influence overall.
Walter Smith: Yes, there
are positive signs as the insurance market seems to
be stabilizing from a pricing standpoint, and we are
seeing signs that some lines of coverage are even beginning
to become competitive again. There are factors that
will probably prevent a free fall in insurance prices
to late 1990s levels — the lagging performance
of the stock market, the demand by re-insurers to continue
their profitability trend, the fact that specific lines
of coverage, i.e., workers compensation, professional
coverages (Directors & Officers liability and malpractice
insurance) continue to be unprofitable, and finally
several large insurance carriers are still haunted by
the past (i.e. asbestos Liability settlements). However,
in my estimation, we’ve probably reached the top
of the market’s rise and with a few exceptions,
consumers will likely see little or no rate increase
the remainder of this year.
Dorothy Dembowski: Underwriting
an organization’s true exposures is a trend that
I view as extremely positive for both sides. Risk management
planning and programs have returned to many industries
where standards have declined over the past 15 years
due to the costs associated with their implementation
and support. Risk management controls protect the organization,
its operations, its reputation and its people. Organizational
risk is no longer simply hazard risk but also operational,
financial and strategic. By underwriting an organization’s
operations, those with strong risk management tools
in place will be rewarded at renewal time.
Joel Nichols: Insurance
companies will have to learn to make a profit from good
underwriting practices and not just investment returns.
The majority of insurance companies plan to lose money
on their client bases, and make a profit through large
investment returns. Those days are gone and the underwriters
will be stronger for it in the long run. Clients are
also putting more emphasis on safety/loss control and
claim management.
Bad times have a way of getting
rid of marginal players — and I mean the insurance
companies. Those companies left will be strong and smart.
The good risks (clients) will get the good rates, and
the bad ones will pay for their sins when insurance
companies underwrite properly.
Are you
optimistic or pessimistic for the rest of 2003?
R.C. Moore III: There is
a positive note for commercial insurance buyers. Virginia
is viewed as a good place to do business from an insurance
standpoint. The varied economic base, available labor
force, and growth potential contribute to a sound business
environment. All these factors encourage carriers to
write coverage in Virginia. If we continue to attract
insurance providers to the state, it will help in availability
and favorable pricing for Virginia businesses.
Jim Kitchin: For Virginia
in particular, I am very optimistic. Virginia is traditionally
pro-business and has a very conservative judicial climate
which makes it a growth state for most insurance carriers.
In contrast to recent years, our carrier planning meetings
have centered more around growth and less on the need
for rate and withdrawal from unprofitable lines. This
bodes well for our clients and our sales organization.
Walter Smith: From a regional
standpoint, I am optimistic as Virginia has traditionally
been one of the most competitive states in the U.S.
from an insurance cost standpoint, and that continues
to be the trend. That is to say, Virginia is seen by
most insurance carriers as a "growth" state
because of the strength and diversity of our economic
climate, our relatively low exposure to catastrophic
loss (weather, earthquake, etc.) and our traditionally
pro business legal climate. So, even though insurance
costs have risen statewide in almost all lines of coverage
over the past 24-36 months, we are still far below the
national average in terms of our "cost of risk"
in Virginia and that is a positive trend that will almost
assuredly continue.
Joel Nichols: From the
perspective of our firm, I'm an optimist. The flight
to quality has allowed us to gain new clients who want
effective safety, claim management and risk management
services. From a general standpoint, I'm similarly optimistic,
but less so. Once we get the Iraqi war behind us things
should improve rapidly.
John Love: We specialize
in three industries in the mid-Atlantic: high tech,
non-profits, and construction. Although each of those
industry segments have their own problems from the overall
economic slump our region is faring better than other
parts of the country and the vast majority of our clients
are stable and beginning to show the first signs of
growth - so we are optimistic. Due to the quality of
our agency's personnel and the relationships we maintain
with clients, AH&T actually had its best year ever
in 2002. The tighter economy brought out the best performance
in our associates.
Thomas Brown: I worry about
the financial health of some of the carriers and the
impact of the asbestos litigation, but all in all I
am optimistic we have seen the worst and things will
get better.
Return
to Virginia Business - May 2003
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