Ensuring Your Insurance

In late September, John McClary, CFO of Windway Capital Corp., Sheboygan, Wis., learned that Windway's insurance company was withdrawing a quote for aviation coverage it had submitted earlier that month. The carrier then revised its bid, dropping the coverage it was offering from $200 million to $10 million -- despite the good loss history of Windway, a holding firm with manufacturing subsidiaries in the food services and the marine industries. "They came back with an unacceptable quote," says McClary. Fortunately, McClary and his colleagues were able to find another top-tier carrier that would insure for the full $200 million; but the price was about 30% higher than Windway's previous policy. Windway isn't alone in its insurance travails. In addition to the horrific human toll of Sept. 11, the United States is suffering an economic toll, and a large part of that is a rethinking and restructuring of commercial insurance offerings and costs. While it's too early to pinpoint the final insurance payout from the attacks, it's likely to range from about $30 billion to $60 billion, reports consulting firm Tillinghast-Towers Perrin, New York. Until September, Hurricane Andrew, which struck in 1992, had been the largest insured catastrophe ever in the world at $20 billion. What's more, insurers had never priced for terrorism risks in the U.S., says Paul J. Krump, executive vice president, commercial insurance, with Chubb Group, Warren, N.J. "We now have the largest single insured loss in the history of mankind, and no one collected a premium (specifically) for it." As a result, even businesses located far from New York and Washington, D.C., can expect to feel the impact when it comes to purchasing commercial insurance. Premiums are increasing at rates of 10% to 50%; stories are circulating of rate jumps of more than 1,000%. Rate increases actually were in the works even before September. After about a decade of price decreases, premiums had begun moving back up beginning in mid-2000. About one-half of the current price increases are a result of Sept. 11, estimates Robert Hartwig, vice president with the Insurance Information Institute, a professional association in New York. The rest are due to other factors, such as rising medical costs and jury awards. Nonetheless, in addition to facing rate increases, even companies that are good risks, such as Windway, are finding it more difficult even to find coverage. That's because the huge payouts stemming from Sept. 11 have limited some insurers' and re-insurers' ability to offer coverage. (Re-insurers offer insurance to insurance companies. For instance, they would agree to pay claims over a certain limit in exchange for receiving some of the premiums paid by the insurance company's clients.) This means for those who can get insurance, the financial stability of insurance and re-insurance companies also is becoming a concern. To be sure, no one is predicting that the attacks will bankrupt U.S. insurers. However, industry experts say another attack would be much more difficult for the industry to work through. "If another huge catastrophic event happened, it could significantly impact some insurance companies," says Bill Schneider, vice president with Henderson Brothers, an independent insurance agency in Pittsburgh. What steps can managers and CFOs take to make sure that their firms can obtain the insurance coverage they need, at a price that makes sense?

As a starting point, prepare at least six months in advance for renewals. Stephen Scammell, a consultant with Tillinghast-Towers Perrin in Parsippany, N.J., recommends compiling five years of loss experience, with summaries of the 25 largest claims, as well as information on the number of employees at each location.

It's critical to keep tabs on insurers and re-insurers to measure their ongoing ability to meet claims. "The most expensive insurance (policy) is the one you buy that doesn't meet its promise," points out Patrick Gallagher, president of insurance brokerage, Arthur J. Gallagher, Itasca, Ill. Watch the insurance company ratings developed by such firms as A.M. Best Co., Oldwick, N.J. Because insurance brokers often hear of impending troubles before policyholders, talk with your company's brokers regularly. Ask what re-insurance companies are involved in your company's account.

Brainstorm creative ways to obtain coverage. Does it make sense for your firm to self-insure or to retain more risk internally? Could your company join with peers to create your own insurance carrier?

While many states have funds to pay claims in the event an insurer runs into financial difficulty, don't rely on them. Most states make these funds available to only very small firms and cap each claim.

Tighten loss control procedures. Over the past decade, some risk managers found it less expensive to purchase insurance than to allocate resources to better manage their risks, says Robert Hoyt, professor of risk management and insurance at the University of Georgia in Athens. That's no longer the case. "Risk prevention and loss control should take a prominent position in the firm," says Gallagher.

Re-evaluate the level of coverage your firm requires. Over the past decade, insurance was inexpensive enough that some executives purchased more coverage than their firms truly needed, says Scammell.

Finally, monitor the impact that the changes in the insurance industry are having on your business partners. Kimberly Pinter, director of corporate finance and tax with the National Association of Manufacturers, points out that even if a particular firm is able to find the coverage it needs, its suppliers and shippers may run into problems. Risk managers and CFOs will want to talk with their partners and make contingency plans.