Commercial Insurance Update – State of the 2010 Insurance Market

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October 2009

State of the 2010 Insurance Market

By Jeffrey W. Cavignac, CPCU, ARM, RPLU, CRIS © 2009 Cavignac & Associates – All Rights Reserved

About this time, many companies begin budgeting for the forthcoming year. A key budget item is insurance.

It is important to point out that regardless of which direction the insurance industry is headed, each company will be affected not only by the type of business it is in, but also by its individual risk profile. Nevertheless, based on past history and current critical indicators, we can make some educated guesses that will help you budget insurance costs for 2010.

Insurance Cycles

If you have read our previous newsletters, you understand that the insurance industry has its own unique cycle. The insurance cycle doesn’t march in lockstep with the typical business cycle.

In a nutshell, the insurance industry is “supply driven.” Supply is determined by the industry’s policyholders’ surplus. Policyholders’ surplus consists of current reserves that are set aside to pay future claims plus an insurance company’s capital.

Insurance companies can make money one of two ways, on underwriting or investments. They generate an underwriting profit when losses plus all expenses are less than premiums. When you divide the former by the latter, you come up with what is called the combined ratio. When the combined ratio is less than 100% there is an underwriting profit. When the combined ratio is above 100% there is an underwriting loss.

Insurance companies also earn money from the investment income they earn on their policyholders’ surplus. During periods of substantial investment returns, insurance companies may be willing to underwrite at a loss because they can make up the deficit on the investment side.

When the industry makes a profit, surplus goes up; when it loses money, surplus goes down. Historically, demand has stayed relatively constant. Basic economic theory tells us that when surplus goes up and demand stays constant, prices will come down. Similarly, when surplus drops and demand stays constant, prices will go up.

The industry is characterized by fluctuations between what are commonly known as “Hard Markets” and “Soft Markets.” When the industry is suffering and surplus is declining, rates typically go up, availability goes down, and coverage is restricted. When the industry is thriving, competition returns – rates go down, availability increases, and coverage is expanded.

Where Are We Today?

To understand where we are today, it is important to understand where we have been. Before we talk about 2010, we need to look back about nine years.

If you look at Exhibit A, you will note that the insurance industry lost $6.2 billion in 2001. This was the industry’s worst year in recorded history. It is the only year to date where the industry actually lost money. The combined ratio was north of 115%, which was close to an all-time high! In other words, for every dollar of premium the industry wrote, they spent $1.15. This caused surplus to drop, and several insurance companies folded their tents. The insurance industry needed to make changes and make them quickly.

If you look at the combined ratio (Exhibit A) between 2001 and 2006, you will note a dramatic improvement (the one aberration was 2005, which was impacted by Hurricane Katrina). The combined ratio went from 115.6% to 92.3%. During that same time frame, policyholder surplus expanded from $295.3 billion to $488.8 billion – that’s over 65%! The industry was flying high. The Return on Equity, which typically in a good year is around 8-9%, rose to 13.9%! The industry earned $85 billion. This was one of the best years ever for the insurance industry. The profits continued to drive policyholders’ surplus, and it grew in 2007 to $517.9 billion.

But the increased surplus created increased competition. Rates (see Table 1), which had started to decrease in 2005 (workers compensation started dropping in 2003), dropped on average 15% in 2007. Compounded with decreases of 5% and8% in 2005 and 2006 respectively,cumulative rates dropped over 25% during that time frame. Rates dropped an additional 10% in 2008, and continued to drop in 2009, albeit not as significantly.

The drop in rate affected underwriting profit, and the combined ratio inched up to 95.5% in 2007. This was no cause for concern as the industry still earned over $62 billion, which generated a return on equity of about 12.4%.

However, 2008 was a different story. Rates continued to drop, falling about 33% from 2005. This drove the combined ratio up from 95.5% to 105.1% – a huge swing. At the same time, investment income dropped. Although it only went down 7%, you need to take in to consideration that it was drawing from a lower surplus. This dramatic underwriting loss and decreased investment returns dropped the industry’s return on equity to 0.5%, making 2008 the second worse year in history. At the same time, net written premiums also dropped – which they almost never do. Finally, policyholders’ surplus dropped as well for the first time in years.

Based on the first half of 2009, it appears that the carnage will continue. Net income was down almost 60% from 2008 (14.1% to 5.8%) and return on equity dropped from 5.5% to 2.5%. Results could continue to deteriorate.

What Does This Mean to You?

Rates have been declining for the last five years. The industry has taken some major hits, and although some newcomers to the industry may try to compete on price, we anticipate that we are on the front end of a hard market. In other words, rates may increase, coverage may become harder to find, and terms could become more restrictive. However, the news is not all bad. Based on what we know, here is what we think you can expect.

The Market in General

Insurers are in an awkward position. While the recent rebound in the investment markets has increased their surplus, they took significant losses in 2008. Despite their drop in surplus, their capacity is still adequate so they can afford to remain competitive in order to retain their market share. This will change at some point, but no one knows exactly when.

We predict that the preferred market for property, liability, auto and umbrella coverages will be flat to plus 5% in 2010. The only segment of this market that will not be particularly competitive are accounts with 20% or more of their total insured values exposed to coastal windstorms.

Similar things can be said about the professional liability marketplace. Architects, engineers, accountants, attorneys, and other professionals with decent loss histories and risk profiles should do fairly well in 2010. Although there will not be dramatic rate reductions, pricing should remain relatively constant.

Workers Compensation

The workers compensation market nationwide is relatively stable and has not changed significantly in the last year. The combined ratio in 2008 was 101%, which is the same as it was in 2007. There are some concerns, however. Medical claims costs continue to rise, and low investment returns make it difficult for insurers to overcome their underwriting losses. California is a different story altogether.

California operates as an “open rating” state. The Workers Compensation Insurance Rating Bureau (WCIRB or “Bureau”) recommends pure loss costs for each of the numerous classifications. These are reviewed by the Insurance Commissioner, who comes up with his or her own rate recommendations. Regardless of what the Bureau or the Commissioner recommend, insurance companies are basically free to choose whatever rates they want. Having said that, the industry as a whole generally follows the rate recommendations provided.

Since July of 2003, rates (Exhibit C) on average have dropped nearly 64%! This is attributable to increased profitability due to workers compensation reform, which had a positive impact on underlying costs. The opportunity for increased profits dramatically increased the competitiveness in this line.

Unfortunately, rates probably went down too far. If you look at Exhibit B, you will see that the combined ratio, which peaked at 185% in 1999, actually came down as low as 54% in 2005. Since then it has more than doubled to 111% in 2008, and it is not looking any better for 2009.

In January of 2009, the Bureau recommended an average increase of 16%. This was countered by the Commissioner, who only recommended 5%. Although each company selected its own rates, as you can see average rates per $100 of payroll still declined slightly ($2.35 to $2.33).

July of 2009 was a different story. The Bureau recommended a whopping 23.7% increase! This had to do with increased medical costs as well as a reversal of some of the reforms that drove costs down in 2004 and 2005.

Steve Poizner, the Commissioner, refused to provide his thoughts in a timely manner. There may be several reasons for this. The Commissioner has taken out papers to run for Governor and there are those that feel he didn’t want an increase of this magnitude on his record. After the fact (mid-July), Mr. Poizner said he didn’t have enough information, and he recommended no change in rates. Recognize that most of the companies that were going to file rate changes had already done so and Poizner’s tardy reply really had little impact on the rates filed.

The industry faces further challenges due to exposure base (payroll) decreases. As payrolls and rate have both come down, total written premiums have dropped dramatically, from $23.5 billion in 2004 to $10.7 billion in 2008. For the first six months of 2009, total written premiums dropped 18% to $4.5 billion.

As mentioned earlier, claim costs continue to rise. The average cost of an “Indemnity” claim (a lost time injury) in 2008 was $57,000, a 48% increase over the average cost of an indemnity claim in 2005.

Although the statistics are not yet published, average rates probably increased 10-15% in July of 2009 (as an example, the State Fund filed for a 15% increase). In all likelihood, rates will go up again when the recommendations for January of 2010 are published.

Recognize, however, that California employers are still in a substantially better position than they were five years ago. Even if base rates increase 20%, when you factor this on top of the 64% rate decrease, average rates are still down over 56% from where they were in the second half of 2003.

Please note that we have been talking about “average” rates. “Net” rates are also affected by experience modifications, premium discounts and schedule credits. The premium you ultimately pay for workers compensation is impacted by all of these.

In addition, rate changes vary by classification – many will go up, and some may come down. If you renew in the second half of this year, on average you should see 10-15% increases. If you renew in the first six months of 2010 you might see 15-20% increases. The best way to estimate your workers compensation cost is to project your experience modification and discuss your specific account with your insurance broker and underwriter.


2008 was an exceptionally good year for the surety industry. Although written premiums dropped in 2009 and the frequency of contractor defaults trended up, 2009 is expected to be a profitable year as well.

Despite this fact, with many contractors burning off their backlogs and the evaporation of residential and commercial work, Sureties are getting the jitters. Public works are just about all that are available to bid on today. The municipal sector is fiercely competitive with very thin margins, if any at all. Where several years ago  five contractors would bid a project, today there may be 20 or more bidders. Oftentimes the low bidder is wondering what he may have left out.

Many contractors have been trying to break into the Federal market. Federal work is plentiful, but has become increasingly restrictive to selective types of programs, such as small business, 8(a), HUB Zone, SDVOSB, etc.

Needless to say, contractor defaults will increase in 2010. Despite these concerns, no major changes have occurred in rate or capacity. However, surety companies are starting to underwrite more conservatively, with their key focuses on liquidity, interest-bearing debt, availability of credit, and overall risk management.

Employee Benefits

Southern California Health insurance rates in 2008 had an average increase of 12% for HMOs and 15% for PPOs. So far, 2009 has seen rate increases of 10-13% in HMOs, 14-17% in PPOs, and 18-22% in qualified Health Savings Accounts (HSAs).

The primary drivers of the overall cost increase for standard HMOs and PPOs are the aging work force, increased costs of pharmaceutical drugs, new medical technology, and the renegotiation of provider contracts (doctors, hospitals, laboratories and other medical facilities).

HSA plans entered the market in 2003 with a flurry of interest from those looking to lower premiums and save pre-tax money. HSA plans have seen higher than expected utilization, which has caused an increase in rates more than those in PPO plans. Consumerism was one of the driving ideas behind the design of HSA plans with the idea that an insured person in a high deductible plan would shop for the best prices before receiving care. But many employers use premium savings to help fund employee deductibles, which allows employees to receive first dollar coverage without having to shop for lower prices.

The original hope for lower utilization and price shopping has not been realized and HSA rates are expected to rise by 20% in 2010. Actuaries do believe that by the end of 2010 or by the beginning of 2011 they will have a handle on HSA pricing, and future increases will be comparable to PPO plans.

2009 has been a very interesting political year for the health insurance industry. President Obama wanted a comprehensive national health care program in place by the summer legislative break, but that did not happen.

Currently the Senate Finance Committee is debating the Baucus Bill (named after its proponent, Senator Max Baucus (D) Montana) and may have a panel vote by mid October. Stay tuned for a special newsletter/bulletin on Healthcare Reform.


The insurance market will transition and costs will eventually go up. This is already happening in workers compensation. Although there are things you can do to prepare for and survive in a hard market, your Cost of Risk really needs to be looked at in a long term perspective. In fact, insurance is just one of the elements in your Cost of Risk – for many companies, it is less than half the total. Other costs include:

● Your time spent analyzing and managing risk

● Money spent on uncovered losses or deductibles

● Your time and your employees’ time spent dealing with losses

The reason for mentioning this is because whether or not the insurance industry is in a hard or soft market cycle, well-run companies will always be looking for ways to effectively manage their risk. Risk Management is not a seasonal or cyclical exercise, it needs to be a vital part of your company. It is only by lowering the frequency and severity of the losses which drive your premiums that you can lower those premiums in the long run.

As a final comment, this article is written from a general perspective. Our prognostications are based on assumptions that could change. In order to more accurately estimate your insurance costs in 2010, youshould discuss your specific situation with your insurance broker and underwriters. ±

Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation or circumstance. Contact legal counsel for specific advice.


How to Prepare for a Hard Market

● Pick the right insurance broker – one who is risk management oriented and understands your business (excuse the self-serving plug).

● Ask your broker for an early indication of cost based on what they know about your company and your business.

● Begin the renewal process early – at least 90 days – and insist that you receive your renewals at least two weeks prior to renewal, preferably 30 days.

● Review your claims history, and if appropriate explain any adverse experience and what steps your company has taken to avoid similar losses.

● Make certain your broker prepares a well thought out, complete underwriting submission. Take the time to author a letter to go with the submission that talks about the steps your company takes to effectively manage its risk. Make sure you focus on your firm’s:

 Loss Control and Safety Efforts 

Human Resource Practices

 Claims Management Strategies

● Review your broker’s marketing strategy. Note that it does not make sense to market your account every year. When and who to market your program to should be a strategic decision.

● If appropriate, consider face to face meetings with specific underwriters to make certain they are a good fit for your company.

● Make sure to place your business with an insurance company that is solid financially and is committed to your business. ±


Risk Management Seminars 2009 Series

450 B Tower, 450 B Street, Suite 1800, San Diego, CA 92101-8005

• Sexual Harassment Prevention Training

Satisfies AB1825 requirements

Friday, December 4, 2009 — 8:00-10:30 a.m.

All training sessions available to our clients

Reserve early / seating is limited! *

For more information about upcoming seminars Contact Darcee Nichols at or 619-744-0596


What YOU Can Do about 2009 H1N1 (Swine) Flu

As you are aware, the CDC has indicated there is a strong possibility there will be a serious outbreak of the H1N1 flu (swine flu) this season. This is a new strain of flu and is considered pandemic not because this flu is particularly severe but because it has spread to more than 70 countries.

The following suggestions from the CDC (Center for Disease Control) will help control the spread of this flu in the workplace.

1. Wash your hands frequently and keep a Purell dispenser at your desk.

2. Cover your nose and mouth with a Kleenex before you sneeze and dispose of the Kleenex immediately after use. If you don’t have a Kleenex handy, sneeze into the crook of your arm at the elbow (known as the Dracula Sneeze).

3. Don’t touch your face, eyes, nose and mouth during the flu season.

4. Get a flu shot. They are available at most grocery and drug store pharmacy desks.

5. If you become sick, stay home. Check with your doctor as soon as possible as there may be an antiviral drug available for your treatment.

6. Don’t go back to work until you have been symptom free for 24 hours.

7. If you go to work sick or become sick at work, you should be asked to go home until you are well.

8. If others in your family are ill, but you are not, you may go to work.

Did You Know?

The 2009 H1N1virus was originally referred to as “swine flu” because laboratory testing showed that many of the genes in this new virus were very similar to influenza viruses that normally occur in pigs (swine) in North America.

However, further study has shown that this new virus is very different from what normally circulates in North American pigs. It has two genes from flu viruses that normally circulate in pigs in Europe and Asia as well as bird (avian) genes and human genes Scientists call this a “quadruple reassortant” virus.

The 2009 H1N1 virus is contagious and is spreading from human to human. Symptoms of this flu virus include fever, cough, sore throat, runny or stuffy nose, body aches, headache, chills and fatigue. Some people may have vomiting and diarrhea. Note that people may be infected with the flu, including 2009 H1N1, and have respiratory symptoms without a fever. Severe illnesses and deaths have occurred as a result of illness associated with this virus.

Illness with 2009 H1N1 virus has ranged from mild to severe. Most people have recovered without needing medical treatment, but hospitalizations and deaths from infection have occurred.

Of those hospitalized, about 70% percent have had one or more medical conditions previously recognized as placing people at “high risk” of serious flu-related complications, including pregnancy, diabetes, heart disease, asthma and kidney disease.

Young children are also at high risk of serious complications from 2009 H1N1 virus.

The following CDC site can provide you with additional information: ±


Articles courtesy of Cavignac & Associates Employee Benefits Department

We Are Family

Did you know that who you spend time with can affect your waistline? According to a study by the New England Journal of Medicine, obesity can be “contagious.”

Percentage Increase in Your Risk of Obesity if You Have an Obese…

• …Sister: 27%

• …Wife/Husband: 37%

• …Brother: 44%

• …Best Friend: 100%

• …Group of (Same Sex) Friends: 171%

The authors of the study report that “[Americans] base our idea of an appropriate body size on people we trust.”

How can you buck this trend? Try spending time doing physical activity together – take the dog for a walk, play a game of volleyball, or go dancing. Your trusted family member or friend can also be a valuable support system if you both agree to stay fit together! ±


Watch Your Levels

You can better meet your goals for cardiovascular health if you know your blood pressure, body mass index (BMI), cholesterol, and glucose levels. By familiarizing yourself with these, you can aim for specific numbers instead of the general idea to “get healthy.

Blood Pressure

• Normal blood pressure is below 120/80

Body Mass Index (BMI)

• Underweight: Less than 18.5

• Normal Weight: 18.5-24.9

• Overweight: 25-29.9

• Obese: 30 or higher

To find your BMI, visit

Cholesterol Levels

Triglyceride level categories are:

• Normal: less than 150 mg/dL

• Borderline-high: 150-199 mg/dL

• High: 200-499 mg/dL

• Very high: 500 mg/dL or higher

Glucose Levels: Hemoglobin A1c

• 7% is the upper limit of normal

• Action should be taken if HbA1c is over 8%

These are general guidelines. Since individual needs vary, you are encouraged to bring these figures with you to your doctor and discuss what specific goals to set for yourself. ±

Source: National Business Group on Health