Even before September 11, risk managers knew they’d be in for a tough time negotiating renewals on property-casualty policies. They just didn’t know how tough.
The many years of soft insurance pricing and the economic downturn were enough to make for fairly certain premium hikes in the fall and winter renewal seasons. But experienced risk managers were able to prepare CFOs for the inevitable, advising them that while the rises might be steep, they would be manageable. And no one was talking about carriers actually withdrawing offers of coverage.
After the attacks, however, all that changed. Towers Perrin Reinsurance, a consulting firm, predicts the insurance losses from the September attacks will range from $30 billion to $58 billion. A big chunk of that risk is likely to be backed by the reinsurance markets, which have since been thrown into an understandable state of turmoil. Fearing further terrorism, some reinsurers are now withdrawing future coverage from insurance carriers.
The result? Insurers are pulling back their offers, which, in turn, has buyers scrambling to purchase new coverage — when they can get it.
Take Michael Leibowitz, director of risk management for Bridgeport Hospital and Healthcare System, a 425-bed Connecticut trauma hospital. Before the attacks, Leibowitz advised company CFO Patrick McCabe to budget for sharp premium hikes. The hospital’s insurer (a well-known carrier Leibowitz declined to name) then socked the hospital with a 71 percent premium hike and an increased deductible for its property insurance program. That program was set to renew October 1. On the day after the terrorist attacks, Leibowitz called to accept the carrier’s offer. But five days later, Leibowitz got a call from a representative from the insurer, who said that the rate hike wouldn’t cut it because the carrier’s reinsurers were tearing up agreements backing some property insurance lines. The representative said the insurance company was rescinding its offer to Bridgeport Hospital and Healthcare System — and wouldn’t extend coverage past October 1.
Leibowitz had some leverage left, however. He made ”legal inquiries,” eventually discovering that the insurer’s action might constitute breach of contract: In Connecticut, an insurer must notify the insurance department of its intention not to renew a policy at least 60 days before notifying the client. After heated negotiations with hospital management, the carrier agreed on September 24 to extend the policy to November 1. With the extension, the insurer ”would have time to underwrite the risk” and produce a new price quote, according to Leibowitz.
In the meantime, Leibowitz continues to try to cobble together a single competitive program out of price quotes from various insurers. ”If I can get one other carrier to create competition, I’ll be happy,” says the risk manager, who expects that the premium the hospital will pay will far exceed the proposed 71 percent hike from the company’s previous insurer. Such a boost would bust the hospital’s insurance budget, which was finalized in August. “We’ll have to get money from operations, because [property insurance is] one of the things we can’t live without,” he says.
Beggars, Not Choosers
Michael Leibowitz is not the only risk manager having difficulties lining up property insurance these days. Leibowitz says he’s heard, for instance, that his insurer is trying to pull out of other deals as well.
The outlook for purchasing liability insurance is even foggier. As observers point out, it’s hard to predict what legal theories will be brought into play in the lawsuits that are sure to ensue from the attacks. That uncertainty is reflected in the wide swing in the range of predictions made by the authors of the Towers Perrin report. Forecasts for liability losses associated with the attacks run as high as $20 billion, and as low as $5 billion. Workers’ compensation coverage — much of which is self-insured — shouldn’t be greatly affected by 9/11, with projected losses ranging from $3 billion to $5 billion.
In fact, the long-term effect on commercial buyers isn’t likely to be as severe as that of past insurance crises, claims Stephen Scammell, a consultant with Tillinghast-Towers Perrin. Scammell says times won’t be as tough as they were in the late 1980s, when a nationwide insurance crisis made coverage too costly to buy or unobtainable at any price. In those dark days, carriers feared that a changing legal environment — in environmental and asbestos risks, most prominently — would put them on the hook for past insurance policies. In contrast to those systemic problems, what happened on September 11 was a ”single event” involving a loss figure that will be known in about a year or so, says Scammell. Because its effects seem more predictable, it might not shake the insurance market as much.
But that analysis won’t hold true if terrorists strike repeatedly. In that case, uncertainty would take hold, and coverage could dry up. ”I’m very concerned about the reinsurance market,” concedes Scammell, who thinks reinsurers’ capital could dry up if other attacks — or other catastrophes — occur.
So what’s a CFO to do about maintaining coverage in these uncertain times? Scammell thinks that may be the wrong question. Instead, senior financial executives should be asking whether hanging on to insurance is itself the right strategy. He advises CFOs to first figure how much risk their companies are comfortable in assuming.
If a company’s preferred gauge of risk is the hit to earnings per share, says Scammell, a CFO might determine that the company could handle a 1 cent EPS drop if another attack occurs. If a business is insured for such a decrease, a CFO might want to cut the company’s insurance costs by self-insuring or taking a higher deductible. Corporations are usually much less cautious than their insurance-buying habits indicate, he adds.
Still, most companies need at least some coverage, and new buying tactics might be needed now. Jack Gibson, a coverage expert and president of International Risk Management Institute in Dallas, thinks buyers should seek more debris-removal coverage under their property policies. Ramping up that sort of coverage seems like a good idea in light of the devastation at the World Trade Center. Debris-removal coverage is usually for a smaller amount than that of the entire policy.
Gibson also points out that companies — especially big companies with complex risks — need to start renewal negotiations with insurers very early. How early? ”At least 90 days, if not 120 days” before the policy’s expiration, says Gibson. ”I would ultimately ask for a commitment to provide renewal numbers at least 30 days before, but I would first ask for 60 days.”
Such a lead time gives a CFO a chance to draw up contingency plans and negotiate with other carriers when a deal falls through. Risk managers should also come prepared with detailed accounts of their companies’ exposures, both to smooth negotiations and improve their bargaining positions, says Gibson.
Of course, none of those tactics would have aided Michael Leibowitz. For Leibowitz — and a lot of other corporate risk managers — buying insurance in the last month has been a maddening experience. Says Leibowitz: ”It’s basically an exercise in begging.”