COVERAGE CONCERNS
Reasonable coverage modification can
help to contain rising premium costs
By Roy C. McCormick
Substantial increases in both personal and business property and liability insurance rates are expected to impact policies that are renewed and written in 2002. Insurance agents and brokers can help ease the problem for the industry and their insureds by explaining the reasons for sharply higher charges and suggesting coverage adjustments that will relieve their financial concerns.
The performance of insurance companies is closely linked to that of a wide spectrum of corporations because investment in stocks and bonds is a major source of income for insurers. The recent sharp decline in business conducted by many manufacturers, retailers, technology companies and others has caused a drop in the value of their stock and thus the stock market in general. As a consequence, insurance companies' investment income has been seriously affected.
Substantial loss experience, which already was putting pressure on property and liability insurance rates, was affected in an unprecedented manner by the events of September 11, 2001, and thereafter. It is probable that the sharpest rate increases will apply to various commercial risk classifications; however, it is more than likely that all commercial and personal insurance buyers will pay more for current protection.
A third significant contributor to the need for insurers to increase rates is the climbing cost of reinsurance. Catastrophic losses of the sort experienced in New York and Washington are borne in large part by reinsurers, from which primary insurers buy protection. The higher premiums that the primary insurers will pay must be factored into their insureds' premium costs.
Agents and brokers should present these compelling reasons to their customers to explain why insurance premiums are up. They then should follow up with a discussion about how premiums can be contained. Consider the following:
* Property Insurance Perils. Premiums for broad form coverage for buildings or dwellings and personal property under commercial packages and homeowners policies can be significantly less than those applicable to special forms. Many businesses--particularly small ones--as well as individuals who are temporarily unemployed or dealing with less income--can be helped by substituting a named peril form on renewal.
Discussion of the individual perils that are included in broad form property coverage will help many insurance buyers feel comfortable with selecting it when they are undergoing financial strain. Of course, there must be a meaningful premium saving in each case. It is equally important to stress the need for maintaining a proper, high level of insurance.
* Property Insurance Deductibles. Significant premium savings can be achieved by replacing a comparatively nominal deductible with a substantial one applicable to building or dwelling and personal property losses. Percentage discounts for the range of deductibles available from an insurer should be checked; and corresponding premiums, based on limits of insurance, should be figured for the insured's consideration. Both commercial and personal insurance buyers will appreciate this service.
* Property Coverage Adjustment. New circumstances may warrant reduction in the scope of coverage for some insureds. Given their financial concerns, many businesses could opt to carry building coverage on an actual cash value basis, rather than for replacement cost. Busines-owners policies generally cover replacement cost but can be amended to ACV by endorsement.
Other sound commercial insurance modifications that would save money for certain insureds would be exclusion from earnings insurance of ordinary payroll expense for non-management and non-contract employees in specific job classifications. Another endorsement limits ordinary payroll expense payments to a specified number of days, such as 90 or 120.
In the area of homeowners insurance, if the savings are attractive and the insured can be persuaded to keep items in a safety deposit box, the scheduling of stamps and jewelry, for example, can be eliminated on renewal. The insured should be reminded of the basic special limits in the policy for loss of such property.
The insured could consider temporarily eliminating other types of property from scheduling when a degree of coverage is provided under the basic policy.
* Automobile Insurance. Dropping collision coverage on aging commercial vehicles and private passenger cars can create substantial savings. The premium also can be contained by increasing the collision coverage deductible on relatively new automobiles well above, for example, the usual $250 or $500.
Vehicle use classifications are a factor that must be reviewed for both commercial and personal policies. Cars that are covered under personal auto policies but that no longer are driven to and from work, or that no longer are used for business purposes, are eligible for a lower rate category. Premium reduction is warranted when a young, male driver is no longer a resident of the household.
* Payment Plans. Many buyers of property and liability insurance (predominantly package) and automobile insurance--both personal and commercial--have been accustomed to paying premiums annually or semiannually. Current conditions make it highly likely that there will be many inquiries about payment plan options that will make it possible to spread out payments over the year. Insurers will be sensitive to this. The producer is well advised to keep abreast of options and--regarding commercial insurance buyer needs--current plans offered by premium finance companies.
* Conclusions. Any reduction in perils or risks insured against, for example, from special form to broad form coverage, commercial or homeowners package, must be made clear to the insured. The perils or risks insured against must be understood. At the same time, emphasis must be placed on a proper high level of insurance. That high level should be maintained when coverage is reduced to essential perils. (In the wake of September 11, 2001, many businesses began to wonder if they had enough.)
We can understand the financial concern of families in New York City, in which over 75,000 members lost jobs after September 11, 2001, and in Los Angeles, where an estimated 40,000 jobs were lost because of the impact on tourism. The overall economic downturn accounts for far more nationwide. Sound adjustments in insurance arrangements will help such people.
Families, as well as businesses, will have two questions:
Why have insurance rates skyrocketed?
What can be done to contain premiums?
Be prepared to have ready answers. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.