- When terrorists slammed airplanes into the World Trade
Center in 2001, the Donaldson Co. in Bloomington felt the blow almost immediately.
The manufacturer's property insurance renewed just days later, with nasty
surprises.
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- "Our premium quadrupled from $500,000 to $2 million"
and suddenly excluded $150 million worth of terrorism coverage, said Marty
Kohne, Donaldson's safety, environment and insurance manager.
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- After Enron imploded, Donaldson's cost to insure its
directors and officers tripled to $300,000 a year.
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- "You get very frustrated because all these events
affect you, but you have no control," Kohne said.
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- It's a common sentiment among insurance buyers of every
kind, both corporate and consumer. Pushed by events as divergent as Enron's
collapse, terrorism, natural disasters and health care inflation, insurance
costs are spiraling industrywide unlike anything seen in more than a decade.
The insurance inflation is part of what's stifling corporate profits and
eating into household budgets, and experts believe it could be at least
another two years before prices stabilize.
-
- Insurance executives contend they've had little choice
but to make major adjustments in premiums. Paul Bridges, senior vice president
of Marsh USA, the nation's largest insurance broker, explained the increases
this way:
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- "We had an insurance industry that used to make
all of its money off of investment returns on Wall Street. But with the
death of the dot.bombs, those stopped," he said. "Then, with
recent losses, margins reversed and [insurers] weren't making money for
stock holders."
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- "We started ratcheting up prices partly on the backs
of disasters" last year, added Bridges, noting that premiums are still
on the rise. Commercial policies "started off rising 30, 40 and 50
percent and some even 100 percent."
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- There's No Escaping
-
- The burden is being felt at firms of all sizes.
-
- Minneapolis CPA Barry Rogers runs his own firm with six
employees. There have been no major illnesses among his workers, so he
was shocked when his agent announced last year that his premiums were "
'only going up 12 percent.' "
-
- "We had one person who had outpatient surgery done,
and that was the extent of it," Rogers said of the firm's previous
claims.
-
- The firm's health care premiums jumped from $145 per
worker to $163, with the co-payment pegged to go from $15 per office visit
to $25.
-
- Rogers and his agent eventually worked out a plan to
reduce the co-payment back to $15. But employee deductibles for hospitalization
climbed from $300 to $500.
-
- Statewide, commercial health insurance premiums rose
12 percent in 1999, 16 percent in 2000 and 12.2 percent in 2001, according
to the Minnesota Department of Health. Estimates are that rates will go
up again around 12 percent this year.
-
- Health care companies reported their costs rose 9, 13
and 10 percent in 1999, 2000 and 2001, respectively.
-
- In many cases, the rising health care costs are being
partly passed along by employers, effectively canceling out workers' cost-of-living
raises. Workers are then finding that their personal insurance costs also
take more money. Last year, homeowner premiums rose 10 percent nationwide.
This year, homeowners' rates are expected to rise again.
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- "There's no doubt about it, '02 had lots of premium
increases," said Kenneth Ciak, president of American Express Property
Casualty, which collected $260 million in premiums last year.
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- Corporate Coverage
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- "Frankly, it's about time," Ciak said. "On
the personal lines side, we have not had a 9/11 catastrophe, but there
are a fair number of storms that have occurred and the homeowners' product
has just been underpriced. We have not made money for the last four or
five years."
-
- While homeowners paid $37 billion nationwide to protect
their homes against storms, fire and other disasters in 2001, insurers
reported losses and expenses equal to 114 percent of all home premiums
collected last year.
-
- Even corporate coverage, which for years was predictably
and modestly priced, has exploded in cost, thanks to recent events. The
accounting scandals at Enron, WorldCom and other companies have erased
any chance for reasonable directors and officers insurance or cheaply priced
surety bonds.
-
- The recent $1.4 billion settlement by investment banks
with regulators over allegations of misleading stock recommendations also
has increased the pricing pressures on such policies, as insurers brace
for investor lawsuits alleging biased stock research. Directors and officers
insurance protects companies if their executives are sued by shareholders
or other plaintiffs.
-
- A 2001 survey by Tilling hast-Towers Perrin found that
insurance claims against executives averaged $5.7 million for each of its
2,037 corporate respondents that year, up 75 percent from 2000. Shareholder
lawsuits alone leaped 178 percent to cost insurers $17 million on average
in 2001.
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- Paying For Enron's Sins
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- Companies that haven't been sued aren't escaping the
fallout.
-
- Apogee Enterprises of Minneapolis manufactures and installs
exterior building glass. The company has 5,500 workers, 12 directors and
no directors and officers claims in its history. Nevertheless, it is paying
for Enron's sins.
-
- "Last year we paid about $150,000 [in premiums].
Now we can expect it to go way up, maybe triple . . . even though [four
underwriter groups] are very comfortable with Apogee and our governance,"
said Michael Clauer, Apogee's chief financial officer.
-
- "That's the reality of Enron. If you want the coverage,
you pay the price," Clauer added.
-
- Marcy Korbel, a Marsh vice president of financial professional
services, recently shared similar bad news with risk managers from General
Mills Inc., 3M Co. and other firms.
-
- Industrywide, directors and officers "premiums average
50 to 300 percent increases and that's only if there are no claims,"
she said. "We are seeing increases of more than 300 percent if there
is claims activity and even more for companies with market caps over $1
billion."
-
- Policy prices have to reflect reality, said Bob Hartwig,
senior economist for the Insurance Information Institute.
-
- "The end of 2001 and all of 2002 were horrific years
for this country in terms of corporate governance. We have had some of
the worst scandals in the history of this country," Hartwig said.
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- Premiums Going Up
-
- Enron alone hit 11 insurance companies for $350 million
in director and officers claims. Enron's bankruptcy also cost the St. Paul
Companies $10 million in surety bond losses and $12 million in unsecured
debt the insurer held in the energy company. AIG has announced a $1.8 billion
charge in part to deal with claims for both Enron and WorldCom.
-
- All of this was on top of 9/11, which brought insurers
$40 billion in losses.
-
- The St. Paul Companies, which lost $941 million in 9/11
claims, hoisted commercial premiums 32 percent in 2001, and 27 percent
last year to squeak back into the black after a dismal 2001. The company
lost nearly $1 billion in 2001. It earned $290 million in 2002, about half
the $567 million it earned in 2000.
-
- St. Paul CEO Jay Fishman has said premium increases will
continue this year.
-
- At Apogee, the company's property premiums have risen
40 percent, while its general liability premiums doubled. To compensate,
it has adopted higher property deductibles and is self-insuring for workers
compensation claims.
-
- "Not only did we assume more of the cost of claims
but we also incurred even more costs because premiums keep going up. It's
been a very challenging year for us," Clauer said.
-
- On top of that, the company is still waiting for some
projects to get going because of the lack of terrorism insurance, a product
that is only beginning to be offered again now and is likely to add another
cost equal to about 10 percent of the property's regular insurance costs.
-
- "We still have projects on hold because of the developers'
inability to get terrorism insurance," Clauer said.
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- -- Dee DePass is at <mailto:ddepass@startribune.com>ddepass@startribune.com.
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2003 Star Tribune. All rights reserved.
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