Insurance Forecast: What to Expect
By Jeff Cavignac
I began working in the insurance business in 1980 as an underwriter trainee for Industrial Indemnity Co., paid $13,200 a year. An “underwriter,” I was told, evaluated a prospective insured’s exposure to loss and determined an appropriate premium for that account.
What I quickly realized, however, was that the insurance industry was in the middle of a raging soft market. Instead of intelligently selecting the right price for new and renewal business, it was more like, “How low can you go?”
Now we are again in the middle of a soft market, and what I learned 30 years ago is again very relevant. As you start budgeting insurance premiums for 2011, what should you expect?
Property and Casualty
Rates have dropped significantly since 2004. Most underwriters will tell you today that they want to hold rates on their preferred business rather than lower prices, and ideally would like 5-10 points of relief. Unfortunately for them, there is still too much surplus in the market and too many competitors. Preferred accounts therefore can expect flat rates in 2011 and conceivably modest discounts. More challenging accounts, either because of what they do or their loss history, may not be as fortunate. Regardless of whether or not you are a preferred account, it is prudent to start the renewal process early and lock down terms well in advance of your renewal, if possible.
You should also be wary of a new competitor entering the market. An insurance company can only establish market share in four ways. They can: 1) provide broader coverage; 2) offer better claims handling; 3) provide better loss control and education; or 4) extend cheaper prices. Not surprisingly, most new companies opt for option 4. Unfortunately these “newbies” don’t have the actuarial data that experienced insurance companies have, and the likelihood of them surviving long term is remote. This can leave insureds without an insurance company just when they need them the most: during a claim.
Workers Compensation
In California, rates will go up. California operates as an “open rating” state. The Workers Compensation Insurance Rating Bureau (WCIRB or the “Bureau”) recommends pure loss costs for each of the numerous classifications. These are reviewed by the insurance commissioner, who comes up with his or her own rate recommendations. Regardless of what the bureau or the commissioner recommend, insurance companies are free to choose whatever rates they want. Most insurance companies, while not in lockstep with the recommendations, will generally follow fairly close to the recommended rates.
If you are estimating your 2011 workers compensation costs, you should make certain you have projected your 2011 experience modification and discussed rates with your current workers compensation insurance company. It is only by understanding both your experience modification and possible rate changes that you can accurately forecast your costs.
Employee Benefits
There is no way to sugarcoat it: Employee benefits health care costs continue to rise. Medical costs are going up, and health care reform has not appeared to help. The intent of the Patient Protection and Affordable Care Act, (PPACA) also known as “The Reform” or “Obama Care,” is to improve the health care system for all Americans. The extent of the impact to employees and employers has not yet been realized.
What has been realized, well before 2014, is the impact the medical carriers have placed on premium rates to cover the new regulations set forth by the PPACA, such as adult child coverage for all children under the age of 26, the removal of the lifetime maximum, no co-pay or co-insurance associated with annual preventive visits, no pre-existing conditions or limitations for children under the age of 19. The medical carriers, along with their actuaries, have decided these benefits have a greater risk and must be addressed by increasing renewal premiums by as much as 7 percent. It is anticipated that small (50 or less) to medium (50-500) employers will see 15-25 percent rate increases in 2011.
HMO rates are expected to increase at a higher percentage than PPOs in 2011, mostly due to contract renegotiation with providers. To offset this, HMOs will increase co-pays and pass more of the cost to the end user. The High Deductible Health Plans (HDHP) saw very large increases in 2009, and in 2010 appeared to settle at the PPO medical trend percentage increase of 15-20 percent.
Conclusion
The insurance market will transition and costs will eventually go up. This is already happening in workers compensation. Although you can do some things to prepare for and survive in a hard market, your “cost of risk” really needs to be looked at from a long-term perspective.
Jeff Cavignac is president and principal of Cavignac & Associates, a San Diego-based commercial insurance brokerage firm. The firm (cavignac.com) is headquartered at 450 B St., Suite 1800, in Downtown San Diego.