By Nicole Friedman and Leslie Scism
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (February 12, 2020).
U.S. companies are paying more for insurance, a reversal after
years of flat or declining rates for property and liability
policies.
Insurers have raised prices aggressively in the past year on
companies of all sizes across the country. And they have warned
price hikes are likely to continue.
The turnabout underscores a challenging landscape for U.S.
insurers following several years of large catastrophe losses and
continued low interest rates, which have weighed on their
investment returns.
Pretax operating income for the U.S. property-casualty insurance
industry fell by 8% from 2014 to 2018, even as revenue from
insurance premiums grew, according to ratings firm A.M. Best.
Excluding investments and other income, the industry lost money
from underwriting in 2016, 2017 and 2018.
A retreat from some accounts and lines of business by two major
insurance players, American International Group Inc. and Lloyd's of
London, has also helped drive prices higher, according to brokers
and underwriters.
Texas Roadhouse Inc. was hit with price increases of more than
20% for some of its coverage.
"This is the first year we've seen where it really didn't matter
what your loss history was," said Patrick Sterling, who oversees
risk management for the restaurant chain.
"You've had no losses? You're still seeing the increases," he
said. "And that certainly creates some frustration."
Prices on nearly every type of insurance are rising, according
to insurers and brokers. An exception is workers' compensation,
which is highly regulated by states. Excluding workers'
compensation, rates for property-casualty insurance sold to
businesses rose 6.7% from a year earlier on average in the first
three quarters of 2019, on track for the highest annual increase
since 2003, according to brokerage Willis Towers Watson.
The Children's Shelter, a nonprofit in San Antonio that works
with foster children and children who have been abused, expected
its insurance costs this year to rise from last year's $176,000
because the organization grew. But when it received a renewal quote
of $750,000, "my mouth hit the ground," Chief Executive Annette
Rodriguez said.
"We started having real conversations about, 'This is a deal
breaker. We cannot maintain insurance premiums at this level,'" she
said. The organization ended up buying coverage from a nonprofit
insurer specializing in nonprofits for $315,000.
In an earnings call last week, Chubb Ltd. Chief Executive Evan
Greenberg listed rate increases ranging from 3% to 33% across its
various products globally. Increases averaged 8% for U.S.
commercial buyers. Some of Chubb's biggest hikes were for property,
excess-casualty and management-liability insurance for large U.S.
corporations.
"There's nothing that I see that tells me the momentum will
slow," Mr. Greenberg said. "If anything, it's picked up."
Insurance is a cyclical industry. During periods without
catastrophic claims, insurers compete for customers by lowering
prices. Following large natural disasters or other big losses, they
typically raise prices or reduce exposure to certain risks.
The current price increases are partly due to hurricanes,
wildfires and other catastrophes in 2017 and 2018 that cost the
global industry more than $200 billion.
Even following these big events, insurers are well-capitalized
and aren't in danger of running out of money to pay claims. But
insurers' profits are being squeezed by low interest rates, which
reduce income from the premiums they invest until needed to cover
claims. They also face rising prices for their own insurance,
so-called reinsurance.
"You keep hoping things are going to get better," said Bret
Ahnell, executive vice president at FM Global, a specialist in
property insurance.
Prices charged by FM Global declined steadily between 2003 and
mid-2018 before starting to move higher. Industrywide, "people just
finally said, 'We can't operate under these conditions anymore,'"
Mr. Ahnell said.
Insurers say they are also paying more for noncatastrophe
claims. Property losses from building fires and mechanical
breakdowns have mounted, said Joseph Peiser, global head of broking
at Willis Towers Watson.
Some insurers have responded by reducing the maximum coverage
they will provide in a policy, he said. "Insurance companies are
not willing to take a significant bet on any one company," he
said.
In recent months, insurers have cited "social inflation" as a
cause of increased liability-insurance claims. Industry executives
say there is a greater tendency to sue insurers and for juries to
hand out higher awards.
While insurers are used to lawsuits over big insurance policies,
"what we're seeing now is the attorney participation spreading
into...small accounts," said Travelers Cos. Chief Executive Alan
Schnitzer on a January earnings call.
Joanne Doroshow, executive director of the Center for Justice
& Democracy at New York Law School, disputed that insurers need
to raise prices to address lawsuits or large jury payouts.
"There exists no litigation data whatsoever to support the
notion that claims are spiking," she said.
Dual turnaround efforts by AIG and Lloyd's have also been a
catalyst for price increases.
AIG has spent several years improving profit margins that
suffered in the aftermath of its 2008 federal bailout, including
reducing its commercial premium volume.
In 2016, AIG's net premiums written declined by more than 17% to
about $17 billion as the company began to overhaul its book of
business.
Since then, the new leadership's moves include shrinking policy
sizes by tens of billions of dollars in the aggregate, AIG
President Peter Zaffino told investors in December. "The market has
to absorb that," he said.
Write to Nicole Friedman at nicole.friedman@wsj.com and Leslie
Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
February 12, 2020 02:47 ET (07:47 GMT)
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