Fed Up With Insurance Costs?
Why it’s gotten so bad, and what you can do about it
What is it about insurance that gives you a 365-day migraine? Your rates keep going up! You’ve just been canceled! And this just in®ƒyour rates are about to go up again!
Is it really that bad? Yes, but do you really know why? And, more importantly, what can you do about it?
"Plaintiff attorneys are trying to kill society as we know it," says Jerry McAndrews, senior vice president for Universal Underwriters Group in Overland Park, Kan. "They’ve taken the shield and decided it’s a sword." McAndrews hit the frivolous lawsuit nail on the head, but there’s more to it than that.
Remember the lady who spilled coffee in her lap at McDonalds about 10 years ago? She was awarded about $3 million dollars. That case, and many other equally puzzling jury awards, showed lawyers they could win just about any liability case. So when more legitimate opportunities came along, they were ready.
Throughout the 1990s, tobacco companies paid out some $250 billion in settlements. Over the last two years, Bridgestone/
Firestone and Ford have paid out millions to settle some 700 individual liability cases. Cooper, Goodyear, Michelin and others have also been hit hard. Hundreds of non-tire vehicle incident cases have been settled by the Big 3 automakers. Now lawsuits are beginning to swirl around the fast food industry. It seems that wherever there’s a hint of smoke, there’s a legal forest fire about to rage.
And because of the Firestone recall and other tire and auto product problems, attorneys and insurance companies now look at vehicles and tires as high risks that are higher than ever before. The latest entry in the saga is Continental Tire North America, which is recalling nearly 600,000 of the tires it makes for Ford Expeditions and Lincoln Navigators. What will this portend?
High Rates, Cancellations
Because of the special attention some of these national issues bring and a number of others to be discussed later ®“ on a more local level, rates for all types of business insurance are skyrocketing, threatening the very existence of those insurance supposedly protects.
It might get worse before it gets better if the experiences faced by Bob Malerba are any indication. The owner of a small retread operation, a pair of commercial locations and one retail store, Malbera says his annual workman’s compensation premium jumped from $14,000 to $52,000, his health insurance is up 21%, and he has lowered his product liability coverage just so he can stay in budget.
"My total annual insurance bill is $208,000 and I don’t do $4 million in sales," says Malerba, owner of Malerba’s Tire Man in Meriden, Conn.
Presently insured by Affiliated Agency Inc. in New York, Malerba has been turned down by some of the best known insurance companies. "Because we’ve had workman’s compensation claims through the years, including one big one a couple of years ago, I couldn’t even get a quote," he says.
"We were placed in a state Assigned Risk Pool (ARP). I paid an immediate 25% increase in my premium plus a 25% surcharge for that privilege.
"To get back in the good graces of the insurance companies, I must have three consecutive years of zero losses before my loss ratio is acceptable to them. So if I have a loss this year, it will be 2005 before I can clear up my record, assuming I have no further losses," he says.
"Not that long ago insurance agents took care of us. If there was a rate increase coming they told me, and I could offset the increase with costing. Now agents and underwriters are scared to insure us. They want nothing to do with any kind of risk.
"Today, it’s very scary to be in business. Instead of insurance companies aggressively seeking my business like they used to, I have to go to them and sell them on the idea of insuring me."
Training IS the Answer
As a member of the Tire Industry Association’s (TIA) training committee, one of Malerba’s goals is to make all tire dealers a better insurance risk. "That’s a job that will require educating insurance agents, underwriters and tire dealers in every one of our 50 states," he says. "And we must educate NHTSA.
"We must sit down with safety groups, training professionals and insurance agents and demonstrate the power of tire dealer safety training programs as they presently exist and the updates planned for the immediate future," Malerba says, referring to TIA’s extensive tire service training programs.
"As a group, we must be able to show that TIA members are certified, that they are abiding by the rules of that certification, and that their loss ratios are stable or on the decline. If we can reduce a carrier’s exposure to risk, we can help them out of their dilemma and us out of ours.
"We know the insurance companies are facing problems, but they need to know about our problems, as well."
There’s a legal term that strikes fear into the heart of every businessperson. If you’re a tire dealer, restaurant owner or new car dealer, you’re in the "chain-of-commerce," at least as far as the law is concerned. That means, for example, that even though you do not actually make tires, you’re part of the chain that brings those tires to market. If there is a problem with those tires, you potentially have a problem.
Tiremakers may have deeper pockets, but don’t ever discount the potential that liability issues could wash over your business. In the months following Bridgestone/Firestone’s first recall two years ago, Tire Review received numerous reports of dealers having their business insurance canceled without warning. Their sin? Being tire dealers.
"Is there any question that insurance companies are concerned about claims pay outs when we, as tire dealers, are also implicated?" asked Jim Miller, owner of Jim Miller Twin City Tire in Minneapolis, Minn.
"Yes, I’m concerned that my insurance rates have gone up and continue to do so. It may not be fair, but that’s the way the system works."
Just because you are part of the chain doesn’t mean you need to give up all hope. Miller works hard at keeping his insurance company in the communication loop, and has a close working relationship with his agent, his underwriter and a safety group. "And we constantly work with our technicians to make sure they are current with the best certification programs available."
Miller feels that good, open communications and training are two key ways tire dealers can control their insurance rates. According to Miller, premium increases nationwide are somewhere in the 30% to 50% range on average, and much higher in some cases. "The only way to bring rates back in line is to work together with our carriers, employees, underwriters and agents," he believes.
"There is no question that insurance companies are badly strained. But if we don’t do our part in preventing losses, the situation will only grow worse."
McAndrews Speaks Up
"The money paid out for frivolous jury awards comes from your insurance carrier," McAndrews says. "An insurance company or a reinsurance company writes claim checks from the money they make on your premiums and the money they make on the reinvestment of your premiums." Or, at least that’s the way it has worked for decades.
Trouble is, like the rest of us, insurance companies aren’t making much money on their investments these days. Drops in stock and bond investments pushed them to make money the old-fashioned way with higher rates. And perhaps with some justification.
Over the last two years, according to McAndrews, the insurance industry has experienced $9.4 billion in losses, a -2% return on equity and has $5 billion lower reserves than in 1995. It has also suffered significantly increased claim costs.
"Worse, the reinsurance companies, the people who back us when claims exceed $2 million dollars, are raising the premiums we pay," he says. Just last month, the reinsurance industry held its annual conference in Monaco, an event attend by the industry’s giants like Swiss Re and Munich Re. "The price of risk has moved up," the Wall Street Journal quoted Jacques Blondeau, CEO of French reinsurance group Scor Re. "If you are not prepared to pay the price, you’re not going to get covered."
Dirk Lohmann, CEO of Converium Holding AG, a Swiss reinsurance group, told the WSJ, "This year, the message is that things are bad, and we need more underwriting profit. So you might have seen your rates rise 30% to 50% last year, but that’s not the end."
McAndrews pointed to four main factors that have contributed to today’s insurance crisis, a "perfect storm" convergence of unique events.
First, as the stock market began its tumble in 2000, insurance companies began readjusting their rates to compensate for losses caused by years of stagnant pricing and deeply reduced investment results. This is what McAndrews calls a "hard market," when underwriting and investment results deteriorate drastically at the same time.
Second, on Sept. 11, 2001, all of us faced unspeakable new realities. One of those not receiving much attention was the reality that reinsurance companies covered both World Trade Center towers and the planes that were flown into them. Translation: Reinsurance companies have also lost money and have had to significantly raise premiums to their customers. It is expected that reinsurance renewal rates will increase dramatically for all property and casualty insurers, large and small, says McAndrews.
The third factor was the Firestone recall, which called media-amplified attention to a new danger for insurers. With trial attorneys fanning the flames and dockets full of plaintiffs waiting for the jury boxes to be filled, losses for insurance companies mounted.
Aside from these tire-related lawsuits, according to McAndrews, rising liability and litigation costs have increased exponentially nationwide. The effect has been an increase in premiums to cover growing defense and settlement costs.
Fourth, negative publicity aimed at companies by plaintiff attorneys means still more lawsuits, more juries, and more settlements and awards. "The American Bar Association holds seminars for its members to drum up new business," he says. "One of the newest exposures for those in the chain-of-commerce is e-risk through fax machines. If a tire dealer advertises a company’s shock absorber by unsolicited faxes and the shock absorber company is sued, the dealer can be caught in a class action suit. These are the lessons of the ABA."
Lawyers are also using the Internet to actively seek and trade information on similar cases. In the wake of the first Firestone recall, one enterprising group of attorneys even set up a Web site where other lawyers could purchase a tire liability lawsuit kit, complete with forms, filings, other legal documents and a list of "expert" witnesses.
Insurance system abuses, rising medical costs and growing number of claims have also played a major role in rate increases.
"Meanwhile workers’ compensation loss ratios are an astonishing 132% industry wide, and we have yet to consider new risk exposures such as mold and terrorism," he says.
How Do We Get Out of This Mess?
McAndrews says dealers need to review loss runs from the last five years. "Then go over them with your insurance agent far in advance of policy renewal," he says. He believes your agent can help you assess and reduce your liability exposures.
"For example, make sure your liability limits are adequate. Also take a close look at your deductible, maybe you can raise it. Think about absorbing small impact losses out of your own pocket. Decide what you can live with and give it some consideration.
"Liability represents a significant loss exposure for business owners. Everybody knows that, but few do much to reduce losses. Create a paper trail. If you warn a customer that his tires need replacing and he refuses, write a note on his invoice and ask the customer to initial it. If the customer refuses, make a note of your conversation and write down the date and time of the refusal on the invoice. Get a sign-off on everything.
"I would also do everything possible to deter thieves. Install alarms, video cameras, fences, better lighting. Make it difficult for thieves to steal from your business.
"Generate enthusiasm among your employees for preventing losses," he advises. "A loss prevention incentive program can motivate your employees to maintain a safe, injury-free workplace. It’s in their best interests, as well.
"Finally, it’s important to know that you need insurance and we need customers. We can’t ‘cancel’ our way out of this problem, and we won’t. Rather, we will continue pushing for tort reform and working our way through the underwriting cycle we’re in. We believe that sometime next year you’ll begin to see more moderate rate increases."
Does that sound like a silver lining? Maybe not, but McAndrews has a favorite saying that goes like this: "Good companies encounter setbacks and turn them into comebacks. I think that by working together, dealers and carriers can and will turn this into a comeback."
Insurance companies, says New York insurance broker Phil Muller, with Affiliated Agency Inc., view automotive-related businesses as money losers. "The problems today stem from carriers not truly understanding the tire dealers’ business." If they had a better sense of how these businesses operate, there might be some reconsideration.
The other problem is that for too many years, insurance companies competed by lowering rates. "When they should have been raising rates from 5% to 10% a year they didn’t. Now they’re trying to make it all back at once by raising rates from 100% to 300% in the most extreme cases. There are tire dealers and garage owners out there who used to pay $125,000 a year for property and liability insurance. Now they pay as much as $300,000."
The answer, in Muller’s view, may be well-capitalized offshore carriers he refers to as "captive carriers."
"I’m working now on a pilot program in New York state that involves safety groups, captive carriers and tire dealers. It can be successful if tire dealers, underwriters, agents and safety groups talk about ways to reduce loss ratios."
Muller promised more about his project at a later date.
As they say, the horses are already out of the barn. Insurance rates are up, and barring outside influences government intervention or the propagation of other options ®“ they aren’t coming down. But it is also clear that dealers need to be more aggressive in both communicating better with their insurers, and in eliminating one of the root causes of these rate hikes ®“ increased claims.