How the insurance markets for 2011 could impact your business Featured

7:00pm EDT December 26, 2010

The 2011 insurance market seems fraught with both potential landmines and great opportunities. Al Tobin, managing principal at Aon Risk Solutions, says that although insurance companies did well in 2010, there are some factors that are making them cautious entering 2011.

“The more general your risk is, the more competition a company like us can bring to the table,” Tobin says. “More than ever, quality data is key to your renewal, whether it’s a property or excess casualty account.”

Smart Business spoke with Tobin and Mary Pulley, managing director of health care, Aon Risk Solutions, about what to expect in 2011.

What does next year hold for the property, casualty and liability markets?

In 2011, noncatastrophic general property risks, general liability and excess casualty will be competitive. Most insurance companies don’t see a change in the marketplace coming from anywhere other than the catastrophic property side of the business. That means earthquake, terrorism event, or significant wind storm event.

The results from insurance companies are fairly decent for 2010 for two reasons. First, there were no catastrophic property risks in the U.S., outside of the oil disaster — no big hurricanes or earthquakes. The second is that there were a lot of reserve releases — the surplus an insurance company keeps to protect it from incurred but not reported (IBNR) losses.

Insurance companies are pretty conservative; they make sure they have funds set aside for unexpected losses, predominantly casualty-related losses. Last year, insurance companies came to the conclusion that things weren’t that bad on the casualty side, so they had too much money put aside. Their actuaries allowed them to release some of those reserves, which helped boost profits.

Many carriers have been releasing reserves over the last few quarters, which helped boost their profits for 2010. But they can only do that so many times, which is one reason they are saying that they cannot continue to see prices decrease in 2011.

When anyone makes money in any industry, it puts additional pressure on price. You can make the argument that price should continue to decrease in 2011 for most customers, but expect some serious carrier pushback because they believe their pricing has hit an all-time low.

What factors are affecting the market forecast?

As far as catastrophic property risks, the insurance companies review hurricane forecasts with great detail. If it is supposed to be an active hurricane season, insurance companies will become cautious. If it’s supposed to be an inactive hurricane season, they will be excited about potential profits. The forecasts are very active for 2011, which will concern them.

For catastrophic risks, there is one other potential change for 2011: new modeling. The insurance companies use a model called RMS, which changes every year. It is anticipated that the change in 2011’s model will drive insurance companies’ probabilities up.

The reason those model results are going to increase is because they will take into consideration storm damage from a hurricane that may penetrate the coastline. The damage hurricanes do to the coast is generally severe, but the damage that hurricanes can do with significant winds further inland wasn’t taken into consideration in the past.

How will insurance companies react?

On the board level, everyone will have the forecast. The boards will suggest the insurance companies be prudent in knowing the risks they underwrite and buying the right protective reinsurance program. This will just reinforce that.

The behavior it will drive is a conservative view for 2011 from a catastrophic risk perspective, specific to hurricanes. However, if the new RMS model increases an insurance company’s worst-case loss from a Category 3 storm from $1 billion to $1.2 billion, how will it respond? Will it write less business? Will it increase price?

I think the answer is that only the best risks will be written. If you don’t have really good data, you are going to pay more for your insurance in 2011.

What can companies do to make sure their data is more accurate?

You need to know your facilities’ secondary characteristics — year built, type of roof, number of stories, etc. If you have 20 properties in your portfolio, you probably know your top five really well. You may not know the middle ones as well.

In that case, I would highly recommend at least a single year program in which a fire engineer visits the facilities to provide the data so your modeling results are more accurate.

If you don’t provide the information, the computer model defaults to worst case. So by providing the information, you improve the results.

What steps should companies take to prepare for 2011?

Make sure you understand the global insurance marketplace. There are more choices than ever for customers, so getting good advice from your broker is critical.

Look for a broker or agent who uses peer group benchmarking. There are actually situations where your broker may recommend buying less limits. That’s a great thing for a customer to hear in this economy, ‘You’ve been buying too many limits; you should buy less and save some money.’

On the technical property, catastrophic, toughest risks in the world, we rely heavily on benchmarking and modeling to give advice to customers. So doing your homework can really pay off.

In these uncertain economic times, cost is very important. Still, don’t trade a couple bucks for inadequate limits. There is a lot of pressure on risk managers to make sure they are buying the most cost-effective product, but without giving up coverages.

You should not give up coverage. You might save a few dollars, but it’s short-sighted.

Al Tobin is managing principal and national property leader with Aon Risk Solutions. Reach him at Mary Pulley is managing director of health care, Aon Risk Solutions. Reach her at (317) 237-2405 or