The greatest economic upheaval since perhaps the 1930s is occurring now and is affecting virtually every segment of society. If, for example, the insurance industry giant AIG would need nearly $125 billion from the government to stay in business, other insurers should hit rough waters, too.
Q: What effect could all of this have on insurance rates?
A: For the last five years, rates have dropped a lot on most lines of coverage, with the exception of coverage for coastal properties on the Gulf Coast and in Florida and other catastrophic-type lines of coverage, such as earthquake.
We've found that workers' compensation rates are a key to the recent rate decreases. In California, comp rates peaked in the second half of 2003. The average rate per $100 of payroll was $6.46. Rates hit bottom in the second six months of 2007, dropping nearly 62 percent. Rates flattened out during the first six months of 2008, and will probably increase in 2009.
Q: What else should we expect in 2009?
A: In general, the insurance industry remains in good shape. The industry remains profitable and industry surplus is near all-time highs.
But the trends, unfortunately, are not positive. The final impact of what will happen with AIG remains to be seen. If for some reason AIG were to lose its "A" Best's rating, billions of dollars of business would be out on the open market, and this alone could drastically change the insurance marketplace.
Standard & Poor's Ratings Services revised its outlook on the U.S. commercial lines property & casualty insurance sector to negative from stable, because of all this. And Fitch Ratings has agreed, anticipating that the marketplace will deteriorate even further.
Even so, 2009 should be a good year for insurance buyers. The insurance industry is trending down, sure, but strong market capacity and competitive factors are allowing prices to drop in many areas.
Q: Discuss developers' and contractors' general liability coverage in 2009?
A: In general, rates for the construction industry have dropped just as they have for the rest of the market. It is possible now that these rates may have hit bottom, and we do not anticipate further rate decreases for construction-related risks in 2009.
Also, underwriting for this class of business has not changed significantly. Most construction-related policies still have significant exclusions, though, in addition to the standard exclusions found in the ISO Commercial General Liability Policy Form.
It is common to see exclusions for prior work or damage, subsidence, mold, silica, restricted contractual liability coverage, electromagnetic fields, and a variety of coverage restrictions for construction defects such as exterior installation and finish systems (EIFS).
Q: What will property coverage look like?
A: Property insurance costs have dropped dramatically over the past several years. Preferred property risks might continue to see decreases in 2009. Depending on the desirability of the property risk and previous year rate decreases, we are expecting flat to 10-percent rate decreases in 2009.
Q: Casualty coverage?
A: Casualty rates — which includes such things as general liability, automobile liability and excess liability — have decreased consistently since 2004. While these rate decreases have been declining for the right account, there could be further discounts in 2009. But this will depend on the individual risk, its loss history, and price decreases in prior years. Due to competition, some standard carriers have expanded into areas that are traditionally underwritten by excess and surplus lines carriers.
Q: What about Professional Liability coverage?
A: Since 2003, these rates have headed downward significantly for architects, engineers, accountants, attorneys, and other professionals Most underwriters are trying to retain their existing rates, but in some cases, they are trying to charge more — usually with little success.
Q: Final thoughts?
A: Insurance costs are only one element in a construction company's "Total Cost of Risk."
A well-run company will continue to look for ways to effectively lower the frequency and severity of their loss exposures. When rates are decreasing, it's easy to lose focus on your risk management efforts. However, this is not the time to stop investing in risk control programs.
Jeff Cavignac is president and principal of Cavignac & Associates, a commercial insurance brokerage firm in San Diego, CA.
|Month / Year||Amt of Change|
|September 2004||+ 4%|
|September 2005||- 5%|
|September 2006||- 8%|
|September 2007||- 15%|
|September 2008||- 10%|
|Source: Market Scout|