What to expect from the risk and insurance markets in 2012

David Schaake, resident sales director, Aon Risk Solutions

After a year marked by unprecedented economic and catastrophic losses, many companies are wondering what impact this will have on the insurance marketplace in 2012.

With insured losses expected to exceed $90 billion, 2011 will likely be one of the costliest years on record for insurance companies.

“We expect to see rates going up,” says Dave Schaake, resident sales director of Aon Risk Solutions. “Generally, underwriters are becoming more cautious and re-evaluating their books of business, both in terms of rates, as well as terms and conditions.”

Smart Business spoke with Schaake about what companies can expect in 2012.

What does 2012 hold for the property and casualty markets?

We are beginning to see strong movement from property underwriters to get more rate, particularly from companies with natural catastrophe (CAT) exposures such as flood, wind and earthquake. The introduction of Risk Management Solutions (RMS) U.S. hurricane model version 11 guidance for expected losses is up by 25 to 55 percent for most wind exposed accounts.

As far as casualty, workers’ compensation is the one line of coverage where we are seeing rate increases. Businesses are being forced to do more with less, which has had a direct impact on the well being of their employees.

Also, because of the inherent liability, doctors and hospitals are becoming much more cautious when treating injured workers. Coupled with the uncertainty of health care reform, this all adds up to more costs for the insurance companies, which are ultimately being passed on to the consumer.

For certain risks, we are also seeing umbrella/excess liability rates trending upward, despite an abundance of available capacity.

What factors are affecting the 2012 outlook?

Companies with CAT exposures, a poor loss history or a lower risk quality are more likely to be faced with underwriters requiring rate increases and possibly higher deductibles/attachment points. Another factor that continues to impact the insurance industry is the lack of investment income. In the past, insurance companies were able to offset higher loss ratios by the yields obtained on their investments, but underwriters have not had that luxury in recent years. As a result, to achieve acceptable margins, insurance companies are forced to underwrite to a lower loss ratio.

How will the new outlook affect companies’ insurance purchasing and risk management plans?

The impact will depend on how companies budgeted for the upcoming year. Often, when faced with the prospect of higher premium costs, companies will re-evaluate their insurance program and assess the limits and deductibles being purchased.

They will likely also want to seek alternatives from other markets to ensure their program provides the best value for the dollars being spent.

What risk management issues should companies watch for in 2012?

It sounds basic, but companies need to understand their risk and how to control it. They also need to be able to convey that to management and to underwriters. For property risks, this means understanding the potential for loss at their various locations. Companies should also know the impact suppliers and other vendors have on their business. Underwriters will tell you that the recent catastrophes caused many of their insureds to suffer significant ‘indirect’ business interruption losses as a result of losing one of their key suppliers.

For casualty related risks, it is important to have a strong loss control/safety management program. Underwriters want to know how serious a company is about controlling risk. That means not only protecting their employees, but also others while on their premises.

Regardless of the risk, the key is to have the metrics to make sound business decisions, rather than arbitrary decisions based simply on cost. Determine the appropriate level of coverage and work toward it.

What steps can companies take to handle these challenges?

Begin the process well in advance of your renewal. Communicate early and often with your broker. Establish objectives for your renewal, along with a course of action to help you achieve these objectives. This should include meetings with your underwriters to ensure they understand not only your risk but also what makes it better than your peers.

Work with your broker to ensure your renewal submission is thorough and complete; the better the submission, the better the results. Again, talk to your broker throughout the process, but also make sure you have the opportunity to talk to your underwriter. Remember, no one can tell your story better than you.

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