Major Rate Increases Expected for Business Coverage

All indications are that insurance pricing is hardening for all lines of business including workers’ compensation, general liability, property and auto coverage.

After several years of flat rates and even reductions in costs for many lines of business insurance, most are projecting small to medium rate increases in some coverage and large increases in others. Years of fierce competition between insurance carriers, combined with rising costs and a large number of major catastrophes in the United States and around the world are causing most insurance companies to increase their rates.

California Workers' Comp
Nowhere is the change in rates more apparent than in the California workers’ compensation marketplace. For example, the State of California Insurance Fund recently announced the reduction of the workers’ compensation rates on farm class exposures that are also members of the Farm Bureau. Since the implementation of workers’ compensation reform in 2004, the State Fund lost a large portion of its business. Over the years, many companies had more competitive rates than the State Fund and much of the business moved to these other companies. In order to recapture some of that business, it reduced offices and its workforce, and now is reducing rates for a number of classes of business. Whether the new rates will be competitive is still up in the air. The State Fund is reducing the farm rates by about 20 percent, but this may still be higher than pricing from other carriers in the marketplace.

Arizona Workers' Comp
A similar transformation is occurring to the State Compensation Fund of Arizona. The state legislature is forcing this state-run entity to become a mutual company by 2013. Since inception, this has been a state-supported operation, started by the state, run by state employees and backed by the resources of the state in case of financial difficulty. In Arizona, the State Fund has always been very competitive on workers’ compensation insurance. At one time, the State Fund had 60 to 70 percent of the workers’ compensation coverage in Arizona. With the transition to a mutual company, it will no longer have the backing of the state and its employees will no longer be state employees. Now, the State Fund will have to operate the same as other workers’ compensation insurance carriers. In anticipation of this reality, the company is increasing rates and dropping poor accounts. Accounts that don’t contribute to the profitability of the company are not being renewed and the trend will probably accelerate as 2013 approaches. As its rates increase, so will the rates of other carriers as they will no longer have to charge low rates to compete with the State Fund. Because of this, most companies should anticipate at least some increase in rates in Arizona in the next year.

Commercial Lines Rates
On business insurance lines such as property, liability and auto, rates are increasing as well. These rates were very flat over the last few years as a lot of capital entered the market and the number of large catastrophic losses remained relatively low. This past year marked a significant change in that trend, led by the March 11 earthquake and tsunami in Japan. The first half of 2011 was one of the most active years of catastrophic losses in history with $265 billion in losses. The previous high was $220 billion in 2005 for the entire year. These large losses burned through much of the capital of the insurance industry. Although the industry still has some additional capacity, it needs to increase its income to offset these losses. The only way it can do that is to raise rates. Although rate increases so far have been moderate, rates are expected to accelerate.

What you can do
Business owners can offset these increases by managing their insurance coverage proactively. Buy the proper coverage, secure the appropriate limits and work with the best markets. Western Growers Insurance Services can help you put together a very robust and efficient insurance program. For more information, please contact us.