Insurance costs singeing profits

Triple whammy has business rates soaring

Montana business owners have been hit with shocking increases in
insurance costs in recent months.

Tribune Business Editor

Liability and property insurance premiums are going up almost across
the board, and many business owners find the increases hard to swallow
in what they say is a shaky economic environment turned upside down
by the events of Sept. 11.

Those events, however, were just the third in a string of occurrences that
combined to push insurance prices up.

In the past 12 to 18 months, the insurance industry was hit with a triple
whammy of sorts — from Mother Nature, Wall Street and terrorists.

"Last year was a unique year, and 9/11 was really a nail in the coffin,"
said Gary McFerrin of Cogswell Agency in Great Falls. "There were more
natural disasters, and the insurance industry was already in trouble as far
as loss ratios go."

After a decade-long lull, premiums are rising and America’s insurance
industry is solidly planted in what’s known as a hard market — a seller’s

It’s a market that hasn’t been seen since the mid-1980s.

"A hard market is one where coverage is being restricted, prices are
increasing, availability is restricted and there are fewer bells and
whistles," McFerrin said.

Customers often encounter new and strict conditions and terms from
insurance companies before policies are written, he said.

Stormy weather, markets

An insurance upheaval has been brewing for about two years.

In late 2000 and in 2001, natural catastrophes — including Midwest
tornadoes and severe storms, the Seattle earthquake, Tropical Storm
Allison and flooding — resulted in some of the largest claims in history.

The property/casualty insurance markets were severely affected by those
catastrophic losses, and by the realization that even larger catastrophes
are possible in more densely populated areas.

The stock market also wreaked havoc on insurance companies in 2001.

"For a long time, insurance companies were not in a position to make
money on underwriting policies; instead, they made money through their
investments," McFerrin said. "When investments suddenly went down,
there was no investment income, and they are suddenly back to trying to
make underwriting profits."

Stock market gains by insurance companies kept rates low even as the
cost of claims increased. But starting in 2000, declining interest rates
and a less-than-stellar stock market performance reduced the insurance
companies’ reserves.

Underwriting profits dwindled in recent months, said Mark Nicholls,
president of Flynn Insurance Agency.

"Claims cost more than the premiums taken in," Nicholls said. "As long
as they are able to reinvest premiums and get good, quality returns from
the stock market, they are OK. But sooner or later, it starts to get away
from them and rates start to rise."

According to the Insurance Services Office and the National Association
of Independent Insurers, the U.S. property/casualty industry had $16.5
billion in catastrophic claims in 2001 and a net loss of $7.9 billion. By
comparison, the industry posted a $20.6 billion profit in 2000.

Then terrorists strike

Into this changing market came another blow: the terrorist attacks. No
one yet knows the full affect that day will have on the insurance industry.

"Most folks we do business with expect their rates to go up because of
9/11," McFerrin said. "There are fewer insurers in the marketplace and
more restrictions in coverage. The consuming public will see higher
insurance premiums."

Paying those premiums may be easier said than done for many business
owners, some of whom are being forced to choose between paying higher
premiums or settling for reduced coverage or higher deductibles.

"You do get down to decisions — deductibles, levels of coverage, risk
management — and you have to help them understand their options,"
McFerrin said. "But clients need to be able to plan fixed costs for the
coming year."

‘Not a very rosy picture’

Insurance is becoming an increasingly dirty word for business owners
like K&K Trucking’s Dave and Vicki Bertelsen, who struggle to cope with
rising insurance costs and the specter of even higher rates in the future.

"We just have to hustle that much harder, find better rates and try to
increase our rates," Dave Bertelsen said. "But the volume of freight has
dropped off drastically. It’s not a very rosy picture we’re facing."

The Bertelsens will pay roughly $6,000 per rig in insurance costs this
year. That’s about 20 percent more than the $5,000 per rig they paid last
year, Bertelsen said.

Last year, the cost of obtaining an additional $1 million in liability
insurance over and above the required $1 million each rig must carry was
$700 per rig. This year, it’s $2,500 — for each of the company’s 20 trucks
and trailers.

It’s a new era in insurance for many business owners.

"People absolutely got spoiled in the last 10 to 15 years," Cogswell
Agency Vice President Dianne Hanson said. Many businesses doubled
in size since the mid-’80s and paid virtually the same insurance premium
for more than 10 years.

"Commercial insurance has been soft, with decreasing or stable
premiums every year," Hanson said. "But it turned around, and as
professional agents we tried to advise our clients that price increases
were coming."

Planning for the unknown

With unpredictable insurance costs, planning for the future presents a

For Anderson Steel President Susan Humble, the increases didn’t come
as a huge shock because her agent had warned her. The company paid
about 13 percent more this year for general liability.

But Humble is apprehensive about the future.

"He told me to be ready for next year, because (the increase) will be even
bigger," she said. But just how big that increase will be is a mystery.
"His warning was, ‘If you think this increase was bad, just wait until next

Raising prices while remaining competitive with other companies is not
an option, so Humble said she will have to take it off the bottom line and
absorb the cost.

"We’re just going to hang tight and see what happens," she said. "There
are no more easy renewals; we’re taking a hard look at the extras."

Raising prices also isn’t in the cards for John Dupuis, owner of the Viking
Shop, a gift store.

"Montana’s economy is really soft, and all businesses say it’s slow,"
Dupuis said. "Across the board, you just have to absorb that cost. If you
raise your prices, people won’t pay it. You just have to do the best you

The insurance increases Dupuis experienced at his shop have been
manageable so far, he said. Unlike his home insurance — where he
recently quadrupled his deductible in order to afford any coverage at all —
his business insurance increased only slightly. Even if those prices
continue to rise, Dupuis is not eager to pass those costs on to
customers until the economy strengthens.

Taking more risks

Some business owners are holding their breath and going with little or no
coverage, said Bill Zins, sales executive for Montana International

"I guess the only thing they can do is try and see how they can
self-insure parts of their coverage — go out and take the risk," Zins said.
"Some people are by nature more risk takers, raising deductibles and
eliminating the bells and whistles that they can live without."

In a hard market, loss histories become more important, Zins said.

"If a company has a poor loss history, you might find that no company
will take them," he said. "There’s going to be certain classes of business
that won’t be able to get coverage, and I don’t know what they’ll do."

Jim Redeau, owner of Tracy’s 24-Hour Family Restaurant, said he is
fortunate to be paying no more this year than he did in 2001. What did
change this year, though, was the process Redeau went through to get

"It is tougher. They actually want documented proof of the hood system
being serviced and cleaned, and you can’t do it yourself now," Redeau
said. "They want a licensed person to come in, and they are really
enforcing it."

Redeau has been told to expect at least a 10 percent increase when he
renews for 2003.

"I think we’d all better be prepared for an increase," he said. "They have
to cover their losses somewhere."

Bertelsen, however, wonders how he will cover his losses.

"I don’t believe the recession is over; there is so little freight moving
through," he said. "Jacking our rates is an option, but with competition
and freight volumes today, that is increasingly difficult, if not impossible."

Insurance is one of K&K Trucking’s biggest expenses, along with fuel,
wages and tires. And the company’s safety record doesn’t make much of
a difference — his drivers performed well last year, that good performance
is not taken into account, he said.

"Unfortunately we are at such a disadvantage. We offer rewards for safe
driving, but a lot of this stuff is other people’s accidents," Bertelsen said.
"Our performance has nothing to do with what I pay, unless I am really

"They’re saying hang on to your hats, basically. That doesn’t bode well
for us," Bertelsen said. "And you wonder why trucking companies are
going out of business."

‘A pretty scary deal’

Many business owners have yet to feel the sting of increased premiums.
They are taking a wait-and-see position.

Stein Haus bar and restaurant owner Tom Conners renewed his business
insurance policy just weeks before Sept. 11. The small increase he
experienced was nothing out of the ordinary, he said.

But he knows nothing can be taken for granted in today’s insurance
market. "I don’t know what will happen next year; my policy comes up in
August," Conners said.

Looming increases worry Steve Keaster of Keaster Construction in Belt.
"It’s a pretty scary deal."

Residential construction claims are on the rise, and many in the
insurance industry expect the construction industry — along with trucking
and high-risk manufacturing businesses — to be hit especially hard.

As Montana Building Industry Association first vice president, Keaster
said he has seen firsthand just how devastating premium increases can
be, especially for builders who specialize in condo and multiple-unit

Cary Hegreberg, executive director of the Montana Contractors
Association, said rising insurance costs will mean more expensive
construction projects.

"I don’t have a handle on the percent increase, but I do know that
insurance rates are escalating sharply," Hegreberg said. "It’s driving the
cost of construction up for everybody, because if insurance goes up
across the board, those costs will be reflected in the bid."

Making better agents

There’s at least one bright spot in this hard market, the likes of which
haven’t been seen in 15 years — it’s making professionals of insurance
agents, Flynn’s Nicholls said.

"It makes true insurance agents of people, even those who have been in
the business for a long time," he said. "It gives them an opportunity to
shine; it makes them better agents and they have to do more work."

Cogswell’s Hanson agrees.

"Now as agents, it’s been even more incumbent to help (clients)
understand risk management," she said.

"Agents are being educated — it’s like baptism under fire," added Roger
McGlenn, executive director of the Independent Insurance Agents
Association of Montana. "And though it’s a good learning experience for
agents, it’s also a terribly stressful time for them to meet the needs of
their clients."

Business owners might be tempted to search for a new agent or
company in times of rising prices, McGlenn said, but it is not the ideal
time to change carriers.

"Quite frankly, this is a time to increase communications with your
insurance agent so you know the options available to you," he said.

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