After nearly a decade of vicious price-cutting, insurers started raising rates sharply in early 2001. Those hikes were triggered by eroding profit margins and a dramatic rise in claims and lawsuits relating to asbestos and toxic mold. But all that paled beside the September 11 attacks, which handed insurers their biggest challenge in decades. With U.S. companies expected to pay out half of the estimated $70 billion needed to cover the property and lives lost in the tragedies in New York, Washington, and Pennsylvania, the industry's $100 billion worth of assets will be severely depleted.
The attacks thus laid the groundwork for phenomenally higher rates, almost across the board. "Before September 11, we were seeing a gradual increase in prices. Since then, it's been drastic," says Damian Testa, president of Kaye Insurance Associates, a New York broker. Even health-care insurance is expected to rise by 16% to 18% in 2002, following a 12% hike in 2001. Life insurance is the only line that won't see substantial price increases.
No doubt, price hikes will be hard on policyholders. From apartment owners in Manhattan to meat processors in Iowa, everyone is facing 100% to 300% increases in the costs of property and business insurance policies, which insurers hope will lead to a strong rebound in profits. "Dramatically increasing premium rates are expected to have a positive effect on brokerage commissions and fees," says Patrick G. Ryan, CEO of insurance broker AON Corp. (AOC
) Positive indeed: Aon expects double-digit earnings growth, and Thomson Financial/First Call is forecasting that property and casualty earnings will surge 221% in 2002. This compares with a net decline of 54% last year. Earnings for managed health-care companies should rise 23%, compared with an 8% increase in 2001, according to Standard & Poor's.
Forecasts for prices and profits are, however, colored by an insurance safety net bill that stalled in the Senate in December. The House version called for industry to swallow the first $10 billion in claims on future terrorist acts and for the federal government to pick up 90% of amounts in excess of that sum. That promise had cast a warm glow on the business of "reinsurance"--policies that primary carriers buy to unload some of their big-claim risk. But now that the bill has fallen through, terrorism coverage is in limbo. Until Congress revives the legislation, reinsurers won't write new terrorism policies. What's more, in the absence of federal cover, reinsurance rates on existing terror coverage will probably jump roughly 50%. That should boost Berkshire Hathaway's General Re Corp. Even Chubb Corp.'s (CB
) smaller reinsurance unit "will likely grow at triple-digit rates," says Chubb CEO Dean R. O'Hare.
Meanwhile, serious problems that dogged the insurance sector before September 11 haven't gone away. Lawsuits over product liability, negligence, and discrimination increased at a 15% annual rate in the late 1990s. Starting in 2000, asbestos lawsuits reappeared with a vengeance. At least eight otherwise solvent companies filed for bankruptcy protection in 2001 after being named in asbestos cases. Standard & Poor's figures insurers will have to strengthen reserves for asbestos settlements by at least $30 billion.
Household mold is proving to be an expensive problem, too. Thousands of claims and lawsuits related to toxic mold in Texas and California homes could cost insurers billions more. In May, a jury awarded Melinda Ballard and her family $32 million for mold damage in their Dripping Springs (Tex.) home. It ruled that Farmers Group Inc. (FGRP
) failed to properly deal with Ballard's original claim. Farmers Insurance saw mold-related claims double, to more than 8,000, in 2001, and is expected to increase its reserves in the anticipation of more payouts in the future.
Add to this litany some $2.5 billion in payouts related to July's tropical storm Allison, and it's clear that insurers will start the year with sharply reduced balance sheets. Their investment-portfolio cushions shriveled with the stock market collapse, and yields on their bond investments are declining because of lower interest rates. Still, barring any new catastrophes, by midyear, skyrocketing rates should bring a break in the gloomy weather.
By Pallavi Gogoi in Chicago, with Mike McNamee in Washington
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After nearly a decade of vicious price-cutting, insurers started raising rates sharply in early 2001. Those hikes were triggered by eroding profit margins and a dramatic rise in claims and lawsuits relating to asbestos and toxic mold. But all that paled beside the September 11 attacks, which handed insurers their biggest challenge in decades. With U.S. companies expected to pay out half of the estimated $70 billion needed to cover the property and lives lost in the tragedies in New York, Washington, and Pennsylvania, the industry's $100 billion worth of assets will be severely depleted. 
