What to expect from the insurance market in 2012 and what you can do to prepare Featured

4:59pm EDT February 11, 2013
What to expect from the insurance market in 2012 and what you can do to prepare

You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.

“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”

For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.

“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”

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

What factors are affecting the 2012 outlook?

The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.

However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.

What are some of the emerging risks for 2012?

Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.

Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.

It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.

Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.

Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.

You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.

How will this outlook affect companies’ insurance purchasing and risk management programs?

With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity.  As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.

Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.

It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.

Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at kevin.pastoor@aon.com or (248) 936-5346.