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.