Insurance: Higher Rates, Less Coverage


For years, John Carello, vice-president of Beechmont Bus Service in Mount Vernon, N.Y., has kept accident-related and other financial losses down. The company has rarely had fender-benders with its 187 school buses and other vehicles, nor has it ever filed a claim for more than $1 million. Yet Beechmont's two-tiered insurance rates, which already ate up 10% of revenues last year, just jumped 40% on coverage up to $1 million and doubled on coverage for the next $9 million. "It's hard to stay profitable when rates rise this much," he says.

Across the U.S., companies large and small are facing the same problem as they look to insure against everything from terrorism to workers' compensation. After declining an average of 6% since the mid-1990s, commercial property and casualty rates rose 15% last year. A 30% hike could come this year.

Moreover, the costly policies often cover less risk. Look at the Durst Organization, which owns the Condé Nast building in New York's Times Square. Not only do insurers refuse to cover terrorism now, but the maximum payout has also shrunk to $600 million from $1.5 billion a year ago. Meanwhile, rates tripled. "I understand why they won't cover terrorism," says Co-President Douglas Durst. "What's unconscionable is raising rates for such reduced coverage."

FUELING THE RISE. Many insurers also are doubling or tripling the deductible on other types of coverage. Chris Mandel of the Risk & Insurance Management Society, which represents corporate-risk managers, says his members are now being forced to pay the first 5% of the insured value for hurricane damage, up from 2%.

Why the massive rate hikes? Insurers clearly are trying to recoup losses from September 11, which stand at about $38.2 billion, says the Insurance Information Institute (III). But other factors are also fueling the rise. Falling stock prices and interest rates have battered insurers' investment returns. Insurers paid out $53 billion more in claims than they took in from premiums in 2001, but made only $37 billion from investments. A year earlier, investments brought a $9.5 billion surplus.

At the same time, doing business looks riskier than ever -- and it's not all because of terrorism. An escalation in the frequency of lawsuits and the size of awards for liabilities ranging from asbestos to shareholder fraud also has insurers worried. Says Mark Lescault, chief underwriting officer at Swiss Re's Americas Div.: "We're taking a very hard, clear-eyed look at risk."

HARDEST-HIT. Investors are demanding the same fiscal prudence and bottom-line results from insurers that they want from the rest of Corporate America. In the years of buoyant investment returns, insurers could underprice policies to build market share. No more.

All this means more hard-pressed companies are opting for self-insurance, inadequate insurance, or none at all. So far, the hardest-hit appear to be public companies in such sectors as energy, real estate, health care, and tech, where lawsuits or terrorist activity are likely to be more of a threat. Yet the real pain could come on the key renewal date of July 1, when insurers will price a year of bad news into their policies.

Chief economist Bob Hartwig of the III estimates that up to $10 trillion of risk has already been pushed back on business owners. "Many companies are playing Russian roulette, putting their shareholders and creditors at risk," he says. But, some companies figure, that's a risk worth taking. By Diane Brady in New York


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