Uncertainty Means Volatility In The Business Insurance Market

12/22/03

Insurance agent: What do terrorists and mold have in common?

Business owner: I dunno.

Insurance agent: They’re both going to jack up your rates.

While most Hawaii businesses have no experience with either of these undesirables, together they will contribute to a scarcity of insurance companies willing to write business policies and an increase in premiums from those that do.

“The pricing and the availability of insurance is different than a lot of other services,” said Linda Gilchrist, president and COO of Island Insurance Company. “Generally speaking, retailers know the price they have to get to make a reasonable profit on their products. But with insurance, you don’t know your costs up front.”

If they haven’t guessed right, insurers could be paying out a lot more than they charged for the policies in any given year.

Hence the volatility in the market, Gilchrist said.

“Terrorism has created a bigger risk factor than the companies had imagined previously,” she said. “This new element is making it exponentially greater than what they had seen before. We’ve also seen some other unanticipated expenses, and one of those is mold.”

Getting caught by surprise causes those companies to take a step back to figure out what they need to do next, she said.

“With new kinds of injuries, such as terrorism and mold, [insurance] companies don’t know what that means to future claims,” she said. “So the underwriters and the companies have to take time to examine the situation: What’s the risk? How much exposure do we think we have and how do we have to adjust rates or coverage or the underwriting philosophy? That’s one of the things going on in the industry.”

In so-called hard cycles, consumers can expect availability to drop and prices to climb.

In the current cycle, larger businesses can expect to pay the brunt of the increases, Gilchrist said, while all companies can expect to see workers compensation increase to 15 percent to 20 percent and even higher.

Even insurance companies, which have to buy their own insurance to cover the bulk of their claims, are being hit, she said.

“Generally speaking, the consumer was really getting an insurance bargain in the last five years,” she said. “During that period we bought a lot of reinsurance because we saw it was a bargain. Now we have to review our reinsurance programs, sometime buying less, taking bigger deductibles or different coverage in response to where the market is.”

Most predictions say the cycle will soften by 2005, provided no new difficulties arise, Gilchrist said.

“It’s really hard to estimate,” she said. “One of the things that’s happening is we’ve had so many new episodes, but if it will stabilize and nothing new comes up, it should last two to three years. But if something else appears, it could be stretched out beyond that.”