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RyPN Editorials January 15, 2003
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Ouch! My Premium is Too High!

Editor's Note: During the past year railroad preservation organizations have been reeling from drastic increases in the quotes offered by their insurance carriers. The increase in insurance costs has come at a particularly inopportune time, as a slow economy inhibits charitable giving, and as all heritage tourist attractions wrestle with the changing travel and spending patterns following the events of 9/11.

Why have premiums gone up so much? Why does a good claims history seem to afford little protection? Is there any hope for relief in the future? Bob McCarthy, one of a handful of insurance brokers who specialize in the tourist and heritage railroading industry, offered his thoughts on the current premium crunch in his "McRail News" customer newsletter. Because the points he touches on are of broad interest to our community, we have secured his permission to reprint it here. The views expressed are the author's own, from his perspective as an insurance professional working with our community.

When you look at your renewal premium this year, there is probably no better comment than "Ouch!" Premiums for all lines of insurance have taken a significant jump.

Some assume that this is due to the unprecedented losses that occurred on September 11, 2001. This is partly true, but there is much more to the story. First, we focused on the tremendous loss of life and personal tragedy that had been so brutally visited upon us. It wasn't very long, however, before we began to realize the financial implications of that horrible day as well. Certainly, we lost a lot more than our innocence and feelings of security that day. In 2001 the total bottom line value of the insurance industry actually decreased for the first time in history.

There are, however, other factors at work here. After the longest investment boom in history, the financial markets began faltering about two and one-half years ago. As a result, we had already begun to see some "hardening" in the insurance market. The fact is that anyone who started buying business insurance in the 1990s has had no experience with the normal roller-coaster nature of the business. When times are good in the investment market, insurers eagerly pursue business, offering competitive pricing and expanded coverage. Before long the results start to come in with losses in excess of premiums.

But, with investment returns still exceeding such underwriting losses, there is little incentive to change their practices. In fact, there is some strong reluctance when an insurer realizes that others might more easily take significant volumes of business away from them. Who's going to be the one to dive in first and raise prices?

Very often it takes a natural disaster or two to shake them to their senses. Soon we begin to see dire predictions of doom in industry periodicals. Major insurers state that they are seeing red and can no longer overlook basic underwriting principles. Programs labeled unprofitable are discontinued and even clients with no losses are dropped or offered drastic premium increases with no willingness to negotiate. Typically, after a couple of years the insurers have healed their wounds and we begin to see new programs and more competitive premiums. Then, before long the cycle starts over again.

But, the long investment boom of the 1990s made things different. Some industry prognosticators were even so bold as to state that we had seen the last of hard markets, a comment that most seasoned veterans found quite amusing.

By the fall of 2001, we had seen about two years of poor investment results. Some insurance markets had already begun to disappear or shrink, and premiums had begun a marginal yet consistent increase. Then, as we all know, the September 11 disasters, far worse than any natural disaster, eliminated any lingering thought of competitive insurance offerings. Premium increases were definitely overdue. In addition, the international reinsurance facilities that make it possible for our insurers to offer high limits and large volumes of coverage had lost much of their capacity.

Immediately, buyers of high property insurance values found they could not purchase all they required and were forced to settle for less protection at double or triple the cost. Commercial Automobile insurance, always considered a tougher line and especially hard for truckers and those with unique vehicles, had already become restrictive by Fall of 2001. Now the word became "Stay with your current insurer and be glad to pay the big premium increase, because new offers are not available anywhere."

By the Spring of 2002, industry periodicals reported an average increase of 31% in General Liability premiums across the country. For Railroads renewing with the same insurers, premium increases are currently exceeding 20% in most cases; and this is for those with no losses or growth in their operations. For those who have been dropped by an insurer which has withdrawn from the market, the result has generally been more severe.

Capacity is our current problem. Where there were 5 insurers writing liability for freight railroads in the Fall of 2001, there are now only 3. For tourist and scenic railroads, where there were 6 in the Fall of 2001 there are now only 2. Offerings for other lines of coverage for railroads are likewise restricted, and the same is true for rail contractors, service companies and suppliers.

The first obvious question is "What can I do?" The honest answer, unfortunately, is that not much can be done to avoid these increases. Obviously, this is a good time to look very carefully at your safety program and try to avoid all claims that make things worse. Reduced coverage, deductible changes, etc., have to be evaluated on an individual account basis, but sometimes are not very effective.

Next, one might ask how long this hard market is likely to last. Some predict no turnaround until 2004. But, much like the earlier predictions of no more hard markets, such predictions are often incorrect. Certainly, it will last a full two years, but it seems unlikely that the increases experienced this year will be repeated the following year. However, with underwriters convinced that premiums should have been increasing gradually over the last several years, it seems certain there will still be some increases.