Page 6 - NJ Cooperator Spring 2020

6 THE NEW JERSEY COOPERATOR —SPRING 2020 NJCOOPERATOR.COM INSURANCE Insurance is cyclical; there are hard mar- kets and soft markets, and insurance com- panies typically make money in two ways: They also tighten their guidelines to try and underwriting profit, and investment income. write only preferred risks, which limits the When the market is soft, insurance compa- nies are looking for market share, so they tion can get a quote from. Sometimes they lower their premiums and relax their un- derwriting guidelines, which allows them matters worse, some carriers or programs to write more business. New carriers or simply stop writing insurance during this programs enter the marketplace and charge time, so there are fewer options for commu- lower premiums to gain market share, which nity associations. reduces premiums further. Insurance com- panies can afford to charge lower premiums, as they typically are making a nice bang for market, one of the worst I have seen in my their buck via investments. In a hard market, it is the opposite. When What is contributing to this? the market is hard, insurance companies are not making money by investments, and loss- es start adding up. This makes them unprof- itable at the premiums they are charging, so to become profitable, they raise premiums. number of companies the “average” associa- add exclusions to restrict coverage. To make Hard Times We are currently in a full-blown hard 25 years of being in the insurance industry. In the property arena, natural disasters such as hailstorms in the South and Mid- west, wildfires in California, various hurri- canes, flood and water issues in a number when they are), the property owner is held of states have resulted in billions of dollars responsible – and the judgments can be as- in losses for insurance companies. Because tronomical, easily reaching seven figures. of this, they are purchasing more reinsur- ance – which is insurance that insurance panies we deal with recently indicated that in companies buy. So if there is a building just the past seven years, they have had more insured for $50M, an insurance company labor law claims that have exhausted the may not want to take on the full exposure, $1M policy limit than they had in the pre- so they may only directly insure $25M of vious 40 years combined. Also, in response it, and will purchase the other $25M from to grim social trends, active shooter claims a reinsurance company. Currently, they are have increased dramatically. unwilling to use their own capital, so they are purchasing more reinsurance – and so the reinsurance costs have increased. In addition, the replacement cost of Whereas rates used to be extremely low for building materials like brick, wood, ce- ment, etc. has increased. Insurance com- panies are looking closer at what the actual have had difficulty renewing their programs replacement cost of a building is, and are at rates anywhere near expiring. In addi- finding that many buildings are underin- sured. Whereas this may have been OK in so what was $100M limit last year may be the past, as the thought process may have $50M this year, at a higher cost. One of the been that total destruction was unlikely – largest program managers has been offering especially on multi-building complexes or renewal quotes on umbrellas that are about fire-resistant buildings – now companies 400% higher! are requiring buildings to be insured to their full replacement value. They also have Underwriting Officer of New Empire Group, more accurate software these days that can a program manager specializing in commer- better determine the actual replacement cial umbrellas for community associations, cost. So property limits are increasing. Liability and Labor Law Reinsurance is just one component who are still around are raising rates by leaps contributing to the current hard market. and bounds. Others are exiting the market In the liability arena, slip-and-fall verdicts entirely. The long and short of it is that the continue to rise – and some carriers are not umbrella market rates are starting to rise, writing in certain jurisdictions anymore, and may eventually get to the level of the because while a property itself may be an standard market rates that have traditionally excellent risk, the jurisdiction it’s located in been for larger or tougher-to-place risks.” may be unappealing for less tangible reasons. An underwriter from one of the insurance to $1,000 per million of coverage. These days companies we use indicated that “continued a 100-unit building can get a $100M umbrel- multimillion-dollar judgments driven by la policy for $5,000 to $6,000. Imagine only sympathetic juries and social inflation – de- fined generally as rising costs of insurance claims resulting from societal trends and insureds are shopping – or ‘remarketing,’ in views toward increased litigation – broader industry parlance – their insurance. Both contract interpretations, plaintiff-friendly standard and wholesale carriers are seeing legal decisions, and larger jury awards are increased submissions. One underwriter I all playing a large role in carriers increasing spoke with said the submissions she has re- premiums.” In addition, in some markets labor laws few months, and she’s overwhelmed. This is are extremely unfriendly towards property allowing underwriters to be more selective owners, who are almost always held respon- sible for injury to a contractor or employee of the property. Unless all I’s are dotted and kets are willing to provide a quote, insureds all T’s are crossed (and sometimes even The president of one of the insurance com- It’s Hard Out There... Market conditions are wreaking havoc in the commercial umbrella arena as well. high-limit umbrellas of $100M or $200M, the risk purchasing groups that write them tion, some of the programs are losing layers, According to Robert G. Mackoul, Chief “Judgments...are getting larger and larger, and carriers are running scared. The ones Standard market rates are generally $500 being able to get $10M for that same cost? Because premiums are increasing, more ceived are up approximately 30% in the last in their risk selection. In addition, because less standard mar- Parsing the Insurance Market Understanding What the Current Cycle Means to You BY EDWARD J. MACKOUL continued on page 18