Partly sunny forecast for 2007
Away from the coast, insurance rates are expected to drop

by Joan Tupponce
for Virginia Business
December 2006

How's the weather for commercial insurance next year? That depends on which side of the umbrella your company stands. Those in search of insurance for property away from the coast will find shelter, with insurance rates falling. Businesses with established emergency continuity plans may see even further reductions in price.

Companies with coastal property, however, could face a good soaking, thanks to the losses incurred during the hurricanes of 2004 and 2005. In some cases, catastrophic property insurance has jumped 300 percent to 500 percent. At the same time, capacity (the supply of available insurance) has decreased.

In short, the 2007 market is shaping up to be "a tale of two worlds," says Walker Sydnor, president of Scott Insurance in Lynchburg. "You have coastal property exposure and then you have all other commercial insurance."

Ironically, the quiet 2006 hurricane season (in combination with solid investment returns for insurance carriers) is creating the optimistic outlook for the "non-coastal," or "non-catastrophe," market. "2007 has the potential of being a very competitive year," says Walter Smith, regional agency manager for BB&T Insurance Services. "It's a buyer's market."
Not so when it comes to coastal areas. "Coastal property is in disarray. It's a mess," Sydnor says. "So many people have migrated to coastal areas that we have set ourselves up for this problem."

Losses are always top-of-mind for businesses in coastal regions. Insurance carriers haven't forgotten the devastating losses incurred during the 2004 and 2005 hurricane seasons - there were six major hurricanes in 2004 and seven in 2005. "Even though we have had a down season, we still have a lingering effect from the hurricanes," observes Chris Schutt, managing director of Marsh USA Inc. in Virginia. "Insurance companies will be more conservative in the near term, but I think you'll see more and more capital coming in to write risky insurance. That will begin to bring prices down, but not in 2007."

Other insurance experts remain hopeful. Dudley Fulton, president and CEO of USI Insurance's mid-Atlantic region, predicts there will be some softening of the catastrophe property market in 2007 but adds this caveat, "We may have dodged the bullet in 2006 but there still is a real threat out there."

Coastal exposures in the Virginia Beach area, like the rest of the Southeastern coastline, have seen dramatic increases in premiums and decreases in capacity during the past two years. Even if the market begins to soften next year, rates won't return to pre-2006 levels. "We've seen premiums go up three- to four-fold," Fulton says. He believes that capacity may increase in 2007 because of the decrease in hurricane activity this year, and that rates may start to decrease ever so slightly.

In light of the 2007 predictions for other types of insurance, carriers are competing for new business and aggressively working to retain existing accounts, hoping to increase their market share. "I don't think there will be a fire sale, but most customers will benefit from this competition by seeing the cost of their insurance decreasing," says Alex Green, executive vice president of Armfield, Harrison & Thomas Inc. in Leesburg.

Currently, carriers have a great deal of capacity for non-catastrophe property and liability insurance, Schutt says. "There's available capital [that can be] lent to insurers." Auxiliary lines of insurance such as directors and officers liability are also experiencing a softening. "Claims experience in the directors and officers world has shown positive signs," says Schutt. "Better experience leads to better pricing."

Insurance agents and brokers agree that businesses don't have to rely on predictions to reduce their insurance costs. They can accomplish that goal by managing their risks - taking steps to make the workplace safe. "You have to look at your facility from a safety and protection standpoint. You have to be prepared," advises Schutt.

Companies need to create a business continuity plan that can be put into place after a catastrophic event. Unfortunately, as Schutt points out, many businesses don't have a plan that can be activated after events such as Hurricane Katrina or 9/11, forcing them to shut down. "A huge percentage of companies in lower Manhattan didn't go back into business after 9/11 because they didn't have a business continuity plan. You want to know as much about your risk as your insurance carrier does. If you have significant property risks, you would want your broker to model what could happen to you so you understand what the potential loss could be."

Effective loss prevention and loss control programs lower risks, which in turn lower premiums. "Management needs to set the tone that the company is running a safe operation," says Fulton. To do that, many companies create incentives for safe practices, resulting in fewer losses.

Historically, workers' compensation insurance has accounted for the lion's share of casualty risk costs. To combat losses, businesses are adopting more effective ways to track and manage claims, everything from safety initiatives to wellness programs. "While all of these approaches can be productive in terms of managing costs," Schutt says, "organizations need to pinpoint what's driving their costs and invest in approaches that yield the best results."

The bottom line: Fewer losses mean lower insurance rates. "The better your company looks, the more the insurance company will want to write the account," says Green. "A broker can help prepare a client [for better premiums] and will bring in the right insurance company to help them."

Many agencies are offering businesses a total risk management package that includes loss prevention and loss control. Sydnor sees that packaging as a new trend. "Bringing in good quotes isn't enough anymore," he says. "Larger agencies can now be a resource."

It's important for businesses to partner with an agent and insurance company who work as a team to bring in resources that help prevent losses. That's why Sydnor discourages businesses from constantly perusing the insurance marketplace, looking for a better deal. "There are times to go to market for sure, but it's not all the time. If an underwriter sees your company every year or every other year being shopped, that may act as a disincentive. Insurance carriers want a long-term relationship."

Insurance professionals are hoping that the weather will remain calm and that the heated competition between carriers won't break into a price war. If that happens carriers may not collect enough premiums to be profitable, resulting in a hardening of the market. "They could get into a deep hole [if there is a price war]," observes Sydnor. "Right now there is no sign of that. Results are still good."