Filter through the Pollution Market

Understanding developing trends in any market segment is critical to having a successful year. 2012 promises many changes in the insurance industry, but particularly in the environmental segment. Events are finally moving the business in a positive direction, and now is the time for agencies to get on board with the huge opportunities presented by pollution coverage.

This market shift creates great opportunity. Significant growth is expected in the overall services industries as contractors ramp back up in the improving economy. The need for contractors’ pollution Liability (CPL), CPL with E&O, and CPL with premises pollution will continue to grow, as will the value of each account written.

We have already seen significant growth in the facilities arena as well. Pollution coverages addressing the environmental responsibility of a land owner or tenant, as well as those concerned with indoor air quality issues, have taken off in the last quarter. It’s hard to imagine a commercial transaction not needing some degree of environmental coverage by the end of the year. Add to this the projected growth in transportation as the economy improves, and the outlook for over-the-road pollution coverage grows as well.

As the environmental market moves into a positive rate environment, agents have an opportunity to significantly grow their books of business while providing their clients with the best possible coverage. By helping the insured understand the realities of the marketplace and the need for companies to obtain a reasonable rate for a risk, the agent will solidify the relationship with their client. Setting expectations early will help smooth the transition to a more sustainable business model for both carriers and the insureds. By staying focused on offering quality coverage and doing the work of explaining the value of the product, agents can expect significant growth in their environmental book in 2012.

Entering 2011, we were all hoping that a generally improving economy would drive growth. A recovering stock market would siphon capital into other endeavors, and the carriers undercutting the market by forty percent would begin to falter. While there were some positive occurrences, for the most part none of that happened and 2011 proved to be another tough, competitive year in the environmental space.

Going into 2012 the signs are clearly different, and far more promising for the environmental sector. The first positive indicator is the overall improving trend in the economy as a whole. While forecasters are not predicting 2012 to be a year of dramatic growth, there does seem to be a consensus that the economy will grow at a reasonable rate and that unemployment will continue its gradual decline. While this does not mean a big boost in underlying revenues and payrolls, it does indicate some increase, and as our industry knows better than most, any increase is welcome news compared to contraction.

Another positive indicator is the growing understanding of the challenges to insurance company profitability. For many decades, carriers could be successful underwriting to a loss knowing that they can make up the shortfall through investment income. As the equity markets have retreated, carriers have lost the ability to cover their losses through other avenues. For the last several years many have been forced to increase loss reserves, or to reallocate those dollars to more current years. This has created a spiraling effect that can only be adjusted by a core change in underlying philosophy. The end result is that carriers across the board need to actually underwrite profitably. Each individual risk will need to be priced properly to maintain the overall goal of writing to a combined ratio of less than one hundred percent. Only through this fundamental change can carriers continue to prosper.

While this is not an environmentally specific issue, it is affecting our market segment as well. Losses in core environmental coverages appear to remain positive. Where carriers are seeing challenges are in the associates commercial lines. So, for example, when writing a storage tank contractor, the pollution component is generally good, but the CGL, auto, excess, and workers’ comp are all far more challenging at today’s rates. During the long softening market of the last several years, these lines have often been undervalued when balanced against the expected profitability of the pollution component, and the subsequent results have deteriorated.

At a recent national conference, every environmental market we met with had the same message—2012 will be the year they get rate on their book. Increases are no longer a nice idea, they are mandatory. To generate the proper return on equity, underwriting profit will be required. While there have been a few individual forays into rate stability over the last several years, they have all been short-lived solo ventures. This is the first time in years that the message from many carriers is the same, making it much more likely to be sustainable.

This does not mean a 30 percent jump in every risk. While there has been some of this over the last year, most carriers we’ve talked with have indicated a managed approach to reaching their goal. Some accounts will get a modest increase while others may see a larger rise. Loss experience and other underwriting factors will dictate which risks are impacted the most. Some risks may even see another flat renewal, but those will certainly be the industry’s leading accounts.

While this message has come from a large group of carriers, there are others who are not expressing the same need for rate stability. These carriers will continue to make their price the most important component of their offering. Agents will need to understand and accurately present the shortcomings of those programs to their clients. While controlling expenses is important to all businesses, doing it at the cost of coverage is a very risky trade-off.

As the trend towards rising rates takes hold, a clear choice is presented to agencies. Do the agents work to get their clients to understand the need for higher rates, or do they continue to seek out carriers that are willing to sell cheaper coverage? The choice is clear for several reasons.

The first and clearest reason is the reality of insurance company economics. A wide range of companies have clearly expressed the need to change how they do business. This is not a fluke or an anomaly. This is an admission of what has been a growing issue for many years. When a number of very credible carriers take this approach, it brings into question the ability of any carrier to flourish without making similar changes. If several carriers cannot make it work, why would one or two smaller companies be able to? The answer is that they cannot, unless they are providing less coverage, and thus paying fewer claims. As every agent knows, when a carrier is not able or willing to pay claims presented to them, it often becomes the agent’s problem. This is true even when the claim is denied due to exclusions in the form.

In addition to the benefits to long-term customer retention presented by selling the broadest possible coverage, rising rates typically help an agency’s bottom line as well. The rising premium tide will often mean more income and a better revenue stream from existing business.

So, concerned about rising rates with insureds who are still reeling from the recession, what should an agent do? First, partner with a small group of environmental carriers that are taking a responsible approach to this shift. These are the companies that are willing to work with you on an account-by-account basis, not mandating draconian increases across the board. These companies are managing their books to a modest increase, meaning you will get support when you really need it.

You also need to educate yourself on the coverage differences presented by their different forms, and those of your competitors. Being able to point out why a carrier is worth more money goes a long way towards helping the client understand the reason behind the trend.

The insurance industry is, at its core, about promises made and promises kept. In exchange for a sum of money, an insurance company commits to paying an insured for losses, subject to the terms of their policy. Each party in this transaction has a responsibility. Insurance companies have to be responsible about their business and act with integrity to be able to fulfill their end of the bargain. In some cases, this means charging higher rates when results demand it. Insureds have to be honest about what they do, and have to be willing to pay the company a fare rate for the coverage they are asking for, much as they expect a fare wage for what they do.

The agent also has a responsibility to the insured to be sure the carrier clearly understands the risk presented, and that they are giving the insured every possible credit on their rate.

Finally, the agent or broker is responsible for making sure both of the other parties understand each other. They have to explain the value of the coverage, the meaning of the carrier’s rating, and the validity of the rate the insured is being charged. This adjustment of expectations, if done gradually over time, can be a powerful tool for educating an insured to the realities of the market. By doing this, the agent supports a move toward more sustainable rates and a healthier insurance industry. It enables them to provide their clients with better coverage from a stronger company, while also supporting their own bottom line.