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Risky Business
The insurance industry is undergoing dramatic changes in the wake of the 9/11 catastrophe

After a cataclysmic event, any industry would have a difficult time readjusting. But, an event equaled to more than 1,000 catastrophes as defined by the insurance industry would be incomprehensible. How do you process a claim of more than $40 billion on a risk you never calculated?

While analysts have said the insurance industry can withstand the claims of 9/11, Kentucky Department of Insurance Commissioner Janie A. Miller says “terrorism had a major impact on the commercial market so that we’re seeing some limitations and exclusions on terrorism coverage.

“More importantly is how 9/11’s effect on the stock market rippled down across all insurance lines. Insurance companies had money reserves invested in the stock market, which adversely affected capacity and investment yields. Now that cushion is gone. So, the bottom line is [that] rates in all areas of insurance are going up.”

Insurance undergoing dramatic changes
Looking at this impact from a local perspective, “ Coach” Bob Dotson, an agent with State Farm Insurance Companies in Louisville, says, “The whole insurance industry is going through some hard times. Before, the stock market portfolio income had helped offset losses. Premiums are rising and 9/11 had a lot to do with that. Property and casualty claims are larger lately. Meanwhile, the cost to repair things, materials and inflation has gone up. Nationwide, for every $1 collected, State Farm paid $1.16. And, we weren’t the worst hit in the industry.”

“I think a lot of things were coming anyway,” says Robert H. Clarkson, founder and president of Robert H. Clarkson Insurance and R.H. Clarkson Financial Services in Louisville. “Previously, there were a lot of markets to go to who could write business, but those have really shrunk. Maybe there were 10 markets, now there’re three. And, to get a quote on what the insured wants covered, what he can afford, and keep that coverage over a period of time is extremely difficult.”

Since May 1964, Clarkson has grown his insurance business to include such large clients as McDonald’s, Sonic Drive-Ins, T.G.I.Fridays, Papa John’s, and Jewish Hospital, in addition to large car dealerships, shopping centers, hotels and apartments.

Clarkson says he’s seen property and casualty coverage balloon from costs last year of $150,000 to $300,000 today for the same business. “We were coming out of a soft market, meaning everybody was writing coverage. But now when you try to renew an account, the companies aren’t there. We’ve had a lot of consolidation.

“Since we live in Kentucky, we’re in a low profile area with regard to terrorist acts. However, my company has accounts in New York, California and Miami who want to know if they can buy extra coverage, and it’s not available to them today,” he notes.

Clarkson is already working on coverage for his large businesses that will expire in September because a large percentage of companies aren’t offering renewals. Not only is the P&C business undergoing massive change, but high-risk companies are having trouble too. Physicians are having a hard time getting medical malpractice insurance with affordable rates. To illustrate, St. Paul’s Insurance Company, the largest medical malpractice insurer in the U.S., is not even in that business anymore.

“One thing is certain,” he adds. “For the next year, everybody will see a substantial increase in their business and personal insurance policies or see new restrictions in coverage.”

With 100 offices across the country and more than $3 billion in risk premium, Acordia is the largest privately-held insurance brokerage company in the U.S. According to Jim Carrico, managing director of Acordia, Louisville, all policies exclude war, but now a number of carriers are excluding acts of terrorism also. With some policies, however, if a fire ensues from that act of terrorism, the fire is covered.

In general, the insurance industry is working diligently to push plans through the U.S. House of Representatives and the Senate to give them aid for any future inconceivable risks and use the government as a safety net. Secretary of the Treasury Paul O’Neill has proposed that the government absorb 80 percent of the first $20 billion of insured losses resulting from terrorism and 90 percent of insurance losses above $20 billion. O’Neill contends this proposal limits the government’s direct involvement and keeps intact the elements of our private insurance system.

Warren Buffett, chairman of the board of Berkshire Hathaway (which controls two insurance firms), has an idea that calls for a tax on all insurance sold each year. That money would be diverted to a government fund to be used to pay terrorism claims, much like the Federal Deposit Insurance Corporation was instituted as the government’s backstop against bank failures.

Rising costs and contraction of industry
“What makes the current environment more difficult is the added pressure brought about by financial failures of not only well-known companies such as Enron, Kmart, LTV Steel and others, but the fall of several large property and casualty insurance companies… We have an insurance industry in the process of rethinking what it is and is not willing to insure,” explains Larry Greathouse, commissioner of Kentucky’s Department of Workers Claims.

In 1996, Gov. Paul Patton signed into law House Bill 1 that reduced overall workers’ compensation premiums by clarifying definitions of injury and disability along with other changes such as the deletion of the old “special fund.” The impact was the reduction of the cost of workers’ comp for Kentucky employers from approximately $1 billion in premiums to $700 million without significantly reducing benefits to those truly injured.

“There have been some erosions to that law,” notes Tony Sholar, senior vice president for the Kentucky Chamber of Commerce. “The 2000 General Assembly increased benefits for traumatic injury and tied age and education to the duration of those benefits. The older, less-educated worker has a different benefit than the younger, better-educated one as it calculated it would be harder for the older worker to find gainful employment. Likewise, a number of court cases through case law eroded much of its language, and the outcome has tended to drive premiums back up.”

These issues plus general tightening of the insurance market and 20 percent medical inflation are creating real dilemmas for our workers’ comp market. Of course, in a comp claim the major component is medical cost followed by lost wages and rising reinsurers’ prices.

Reinsurers are vital to primary carriers since they help spread risk among many various carriers.

“Regrettably,” says Greathouse, “some reinsurance carriers are leaving certain markets, not due to the quality of the individual risk but because the reinsurer has placed additional restrictions or qualifications upon industries as a whole.”

The Commonwealth of Kentucky is self-insured for its workers’ compensation through two programs: One for employees of the Kentucky Transportation Cabinet and one for all other eligible state employees.

While it is a difficult time, it’s also an exciting time, according to Roger J. Fries, president and founding CEO of Kentucky Employers’ Mutual Insurance (KEMI). A self-supporting, competitive carrier authorized by the Kentucky legislature in 1994 to compete in business, KEMI is also the insurer of last resort in the state.

With approximately 18,000 policyholders and writing over $ 80 million, KEMI is Kentucky’s largest carrier. A.M. Best Company has rated it an “A- Excellent.”

“Our history has been to price our coverage according to the risk and not market conditions,” says Fries. “Now many of those companies like Legion, Reliance, Frontier, Fremont and Superior National are either gone or are in rehabilitation. We have done a prudent job by not playing in that world.”

“Everyone wants to shop their insurance now and are trading higher rates for higher deductibles,” adds Pete Gibson, managing senior vice president of Acordia. “Many carriers are not renewing risks they don’t want, and as a result, we’re seeing more employers taking the risks themselves.”

Stephanie Rommel is a staff writer for The Lane Report.
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