A ‘buyer’s market’

Commercial insurance rates are falling, thanks to a two-year absence of catastrophic East Coast storms and stable investment returns for insurance companies.

“This is a buyer’s market,” says Walter Smith, state president of BB&T Insurance Services. “Rates have become more competitive. Consumers that have enjoyed a good loss history have seen more advantages over the last two to three years.”

Rates began sliding last fall and are now “flat to somewhat soft,” says John Middleton, president and COO of Richmond-based Tabb, Brockenbrough & Ragland (TB&R), a member of the Dawson Cos. platform of AssuredPartners Inc. “We see that trend holding.”

Although two hurricanes menaced Hawaii this year, neither had a big impact on the U.S. insurance market. “They were in smaller areas that were not as dense with population,” says P. Marshall Fleming, president and CEO of Bankers Insurance in Henrico County. “We really haven’t had many catastrophes other than the tornadoes in the Midwest in 2014.”

Even though the overall forecast is positive for the months ahead, a few industry groups won’t see substantial rate decreases, including health care, energy and habitational (multi-unit dwellings, apartments, etc.) “Some rates in more high-hazards classes of business such as construction, because of the nature of the business, will be higher than typical office risks as well,” Middleton says.

Directors and officers coverage as well as marine insurance and workers’ compensation also may be subject to higher rates. “From a product standpoint, employment practices liability’s pricing is also still firm,” Middleton says.

Hutch Mauck, president of Scott Insurance, which has offices in Lynchburg, Roanoke and Richmond, is carefully watching workers’ compensation because of “the continued increases in medical costs,” he says. “That could put some return pressures on workers’ comp over the longer term, although it’s too early to tell.”

Uncertainty over the renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) also is affecting workers’ compensation, according to the 2014 Marketplace Realities report by Willis Group Holdings. The Terrorism Risk Insurance Act (TRIA) was first passed by Congress in 2002 and reauthorized in 2007 as TRIPRA. The federal backstop program, set to expire Dec. 31, created an insurance market that could provide terrorism coverage.

“If Terrorism Risk Insurance Program Reauthorization Act is not renewed, then that coverage will have to be sought in the open marketplace,” says H.B. Whitmore, president and managing partner of Willis of Virginia Inc. The company has offices in Richmond, Reston and Norfolk. “Essentially it’s acting as reinsurance or a backstop, and if it’s not renewed, that would be a large loss of capacity, which could impact rates. We are negotiating stand-alone terrorism coverage as an option for our clients in case it doesn’t get renewed.”

A bill extending TRIPRA was passed by the U.S. Senate in July but had not been acted upon by the House by the time this issue went to press.

One of the hottest-selling products in the insurance market is cyber liability coverage. Major recent data breaches in the retail and financial industries — think Home Depot and JP Morgan Chase — have brought “widespread public awareness of the damages” that can occur, says Middleton of TB&R. Home Depot’s breach affected more than 50 million credit and debit cardholders. JP Morgan’s affected more than 75 million households. “There are still a lot of companies that don’t have it, but they are certainly interested in it,” Middleton says.

Smith of BB&T also is seeing a lot of activity on cyber liability. “That is a real exposure area that people need to be concerned with,” he says. Smaller companies may not see cyber liability as a big threat, but they shouldn’t overlook it, he adds. “Hackers are going after the most data they can get typically. They are going after bigger companies, but smaller companies usually have less internal security.”

Rates for cyber liability remain competitive. “In general, rates are nearly flat, but there may be some modest reduction,” Whitmore of Willis of Virginia says. “However, because of recent breaches in point-of-sale [POS ] large-box stores and retailers, we are seeing some decreased capacity. POS large-box stores and retailers may see as much as a 20 percent increase.”

His company is working with companies of all kinds to assess, identify and quantify their cyber risks. “We are helping bring together the legal side, IT, security and purchasing. We are looking at vendor contracts,” Whitmore says. “We are doing a lot of sophisticated modeling to help companies estimate their losses and any potential regulatory fines. That’s an exploding area for us because people are realizing they are at risk.”

Other insurance coverage being added to company portfolios includes professional liability and environmental liability. They are becoming more popular as rates become “more affordable and terms continue to broaden,” Mauck of Scott Insurance says.

There has also been a growing interest in insurance products related to pandemics, especially by multinational companies that have operations in areas where disease outbreaks like Ebola can occur. “We haven’t had any calls about it as of yet,” says Middleton.

Companies looking for commercial insurance won’t have any trouble finding coverage because of an ample amount of available capacity. “We’ve also seen some new insurance companies such as Berkshire Hathaway entering the marketplace,” says Mauck.

Competition among insurance companies for new business is heating up and producing rate reductions for accounts with the best loss ratios. Unfortunately, those new business rate reductions aren’t in the cards for companies that are just renewing their coverage. “That is a trend that started last summer,” says Middleton. “When you see that trend, it’s problematic for the rest of your clients.”

There is a way, however, for all companies to keep their commercial insurance costs low. The key is to lower company losses. “Companies’ loss activity drives their cost,” Mauck says. “We are trying to help buyers find creative ways to manage their losses.”

Fleming of Bankers Insurance believes that pristine commercial insurance clients will see low single-digit increases in the first part of the year. “I would not be surprised to see rates drop from around 4 percent to 1 to 2 percent or have no increase,” he says. “I believe during the year they will slide down and flatten out.”

Smith agrees that rates for companies with good loss ratios will decrease. However, the same doesn’t hold true for companies with the worst loss experience. “They will continue to see an increase relative to their individual performance,” he says.