Commentary: Insurance Advisory - Impact on insurance in 2004

In the past few years, insurance industry experts have successfully predicted a continuation of increasing premiums and also a continuation of underwriters tightening their criteria for coverage, especially in those areas associated with Sept. 11, 2001 losses.

While rate pressures have eased on some lines of insurance, there are still issues which could negatively impact the cost of insurance in 2004, specifically industry consolidation, an increase in the mounting number of lawsuits and the effects of the Sarbanes-Oxley Act.

Because these market forces will rarely, if ever, act in isolation of the others, I think 2004 will be an especially interesting year!

Consolidation

This past year saw at least six carriers leave the marketplace. Whether through acquisition, ratings downgrades, bankruptcy or simply choosing to exit the industry, we are left with fewer insurers competing for your business.

As with other business sectors such as manufacturing, service and retail, reduced competition typically brings higher prices for consumers, followed by diminished product innovation, and customer service. Regrettably, we could anticipate some of these factors to emerge in the insurance sector.

Many carriers are seeking revenue growth through acquisition, while others are seeking acquisitions as a hedge against the risks and costs associated with the increase in litigation. In my opinion, this trend, regardless of the reason for the consolidation, does not bode well for the consumer.

Litigation

A report by Tillinghast-Towers Perrin states that for the year 2002 (the most recent data available), tort cases in the United States cost $233 billion which is equal to 2.23 percent of the gross domestic product, or $809 for each U.S. citizen.

Some relief in the area of asbestos litigation may be in the offing as the U.S. Senate is scheduled to take up asbestos litigation reform in March. One of the areas where the Senate has been deadlocked is on the size of the trust fund to compensate victims.

Yet, A.M. Best reports that the industry could be under-reserved for asbestos and other environmental issues by more than $30 billion.

Medical malpractice is another area of increasing litigation and the rising cost of medical liability insurance is most certainly causing some medical professionals to either change specialties or leave the professional altogether.

Sarbanes-Oxley Act

The implications of this federal legislation, where officers and directors of a company can be held individually liable, regardless if there is a company or an insurer to indemnify them, will certainly begin to be seen this year.

Among other impacts of the Sarbanes-Oxley Act, it will be interesting to see what effect, if any, this legislation has on a company's ability to recruit and retain directors and senior management.

The cost and availability of management liability coverage in 2004 will also be impacted by the effects of this legislation.

Each of these marketplace forces are complex and their impact is expected to be far reaching. Further, because many of these impacts are still unknown, it is especially important that you carefully select a broker and that you review a variety of insurance programs.

Finally, I urge you to evaluate the suitability of each of the programs on criteria such as their structure and integrity of the proposed coverage, rather than cost only.

Michael R. Murphy is president and CEO of the Baltimore office of the national insurance brokerage firm of HRH. He can be reached at 410-584-8033 or Mike.Murphy@HRH.com.

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