The Tide Has Turned for the Insurance Market: Where’s It Headed?

The insurance market for the propane industry today is a lot like those reality survivor shows on TV—a sort of survival-of –the-fittest contest to see which insurance company will still be standing when the market loosens up again. The number of companies writing policies nationwide is down to one digit, and it’s a small one. Regionally, there are a few more companies still writing policies, but not many.

What’s the reason for this hard market? According to insurance companies and their agents, the situation has become progressively harder over the past year or two, but a combination of recent factors—including the terrorists’ attacks in September and the economy moving into a slump—have pretty much screwed the lid down tight.

Most of the agents and brokers polled by BPN said the September terrorist attacks were more of the icing on the cake, pushing the market over the top. In an article for the Illinois Bobtail in November, David Lupke of Lupke Rice Associates (Fort Wayne, Ind.) warned readers that the insurance industry has turned 180 degrees and that “ the bubble has burst.” He cited the soft economy, with stocks in a freefall, as a major factor in accelerating the switch from a soft to medium insurance market to a very hard one. With the economy down, insurance companies won’t be making the returns they had been making through the later half of the 1990’s. The returns are the foundation for the insurance companies’, and reinsurance companies’ capital.

The reinsurance industry was feeling the pinch prior to September, but the terrorist attacks have hurt the reinsurance industry much more than the insurance industry much more than the insurance sector. And, the impact has filtered across all business sectors. Insurance firms are on the frontline of sharing the expense of higher reinsurance costs.

Before September, propane marketers were seeing a harder insurance market. During 2001, at least two companies that were writing policies nationwide stopped writing business, at least in the propane industry. This included Old Republic International Corp. and National Farmers said it was not renewing business except in less than a half dozen core states. Other firms, such as Royal Insurance, Farmland, Utica, and AIG, were reducing—or preparing to abandon—their exposure in the propane industry. This pretty much left Nobel, Ranger, and St. Paul, the propane industry’s reliable standby insurance firms.

“Unfortunately, we’re back where we were 10-12 years ago,” said John Caldwell of Caldwell & Associates (San Jose, Calif.). “Insurance companies have been offering products at too low a price for too long.”

Workers’ comp policies are a whole other issue facing marketers. According to some brokers, though, this market is loosening up in some states. Umbrella coverage is also a problem across the country for marketers.
Seeing the current market in even more pessimistic terms, insurance broker Frank Thompson of PT Risk Management Services (Phoenix) told BPN that “American business is experiencing an insurance crisis. The energy businesses are particularly hard-hit, with insurance premiums rising by as much as 400%.”

A Crisis
He also cites a collection of causes for the crisis: the insurance market has been fairly soft since the late 1980’s, which led to a reduction, as high as 50%, in the price of insurance for marketers. At the same time, marketers were seeing there businesses grow. With the price of insurance down, some marketers, said Thompson, slacked off on their safety practices, and their insurance companies slacked off on enforcement. With lower insurance prices, the loss ratio for many marketers in the past five years has climbed. Insurance firms were not making much of an underwriting profit. At the same time, court awards against marketers and their insurance firms were increasing in size and numbers.

The insurance market swings between hard and good times, says Harry S. Lyons of LP Gas Insurance Specialists (Lawrenceville, Ga.). The swing to a hard market this time has a lot to do with this very competitive pricing structure the propane industry was seeing during the 1990’s. He also pointed to the combined loss ratios for insurance firms as being too difficult just as reinsurance companies were starting to feel the pinch from a string of natural catastrophes.

Together, these issues now mean marketers will be paying higher insurance premiums. In addition, there are fewer companies to buy insurance from, underwriting guidelines have become much more stringent, much less coverage is being offered for a lot more money, and marketers are being asked to assume more of the risk through larger deductibles.

When asked what marketers can do to make it through this insurance crisis, insurance brokers said “Meet and exceed underwriting standards.” According to Gary McLean of Jamerson McLean Insurance (Oviedo, Fla.), propane marketers must follow each and every safety practice to the “T” now more than ever before. There is no room for mistakes today, he stated, and insurance companies are finding more reasons to non-renew a policy for even the smallest incident.

McLean and Thompson cited a list of requirements companies want to see before they will renew policies. It includes belonging to industry associations, performing and documenting leak-testing procedures when code requires it or in an out-of-gas situation, providing a host of customer safety information materials in a variety of ways, documenting every action taken by personnel, providing a safety manual and documenting training.