HD25 - The Level of Competition, Availability, and Affordability in the Commercial Liability Insurance Industry


Executive Summary:
The Code of Virginia requires the State Corporation Commission to report to the General Assembly each year:

• The level of competition among insurers with respect to personal injury and property damage liability coverages for business entities;

• The availability of those liability coverages; and

• The affordability of those liability coverages.

The report must identify any specific liability lines or subclassifications for which the Commission has reasonable cause to believe that competition may not be an effective regulator of rates. Insurers will subsequently be required to file supplemental reports with the Commission for the lines and subclassifications found to be potentially noncompetitive, indicating their direct experience (including premiums and losses) attributable to these liability lines.

In preparation for the 1988 report, the Bureau of Insurance conducted approximately 33 separate surveys of consumers, consumer groups, insurance companies, agencies, and surplus lines brokers. The Bureau's research also included reviews of similar surveys and studies conducted by private or independent research firms, investment research groups, and the federal government. In addition, information was solicited from the Bureau's Consumer Services Section as respects complaints received regarding the availability or affordability of commercial liability coverages. Surplus lines affidavits (which must be filed with the Bureau when coverages are written by nonadmitted companies) were reviewed to determine the liability lines most often being written by these insurers. The Office of the Attorney General was also encouraged to provide the Bureau with any relevant information developed by the Division of Consumer Counsel.

In the course of two written surveys (conducted in May and October of 1988), the Bureau questioned numerous insurers, agents, and surplus lines brokers to determine:

• The number of insurers currently writing various commercial liability coverages;

• The extent to which insurers are seeking to write these coverages;

• The degree to which rates are established by rate service organizations; and

• The extent and nature of rate differentials among insurers for these coverages.

In addition to the numerous lines and subclassifications specifically listed in the Bureau surveys, insurers, agents, and surplus lines brokers were asked to identify any other liability lines where they perceived availability or affordability problems. Approximately two thirds of the 300 insurers surveyed provided usable information, while approximately half of the more than 1,150 agencies surveyed provided relevant data. More than half of the 204 surplus lines brokers submitted pertinent information.

Extensive telephone surveys of consumers and consumer groups were also conducted, for example:

• One hundred fifty-two child care providers throughout the state were contacted from a listing provided by the Virginia Department of Social Services and questioned as to the availability and affordability of day care liability coverage.

• Four other day care centers were selected at random and asked for specific details of their most recent liability insurance renewal premium quotations.

• Two child care providers' associations were contacted for information regarding their members' insurance problems.

• A number of state insurance departments were asked to provide information regarding any special programs developed to assist consumers in the day care market segment.

• Telephone surveys of companies and agencies separately addressed day care liability coverage provided as part of Homeowners policies (as opposed to commercial liability policies).

• Administrators/Managers of 49 towns, 24 counties and ten cities in Virginia were surveyed by telephone with regard to the availability and affordability of municipal liability coverages.

• Two additional towns and two additional counties were contacted for specific details of their most recent renewal premium quotations.

• Nine major insurers were surveyed with respect to special liability insurance programs for commercial contractors.

• Competitive quotes were solicited and received from 26 companies for a hypothetical commercial contracting risk.

• Fifty-six establishments licensed by the Virginia Alcoholic Beverage Control Board were surveyed by phone with respect to the availability and affordability of liquor liability coverage.

• Thirty-five pest control operators were surveyed to determine the level of competition within this market segment.

• Twenty real estate agents throughout the state were contacted for information regarding availability and affordability of professional liability coverage.

• Fifty-three consumers within 16 different subclassifications in the recreational liability market definition (including campgrounds, parades, fairs, bowling alleys, health clubs, skating rinks, etc.) were contacted in an effort to identify specific classes experiencing availability or affordability problems.

Similar telephone surveys of consumers, insurers, agents, and appropriate consumer groups were also conducted with respect to other lines and subclassifications where availability or affordability problems were perceived.

Overall, survey results indicate that market conditions have improved and that most forms of commercial liability insurance are more available and affordable than they were 12 months ago. After considering the information developed from the extensive surveys and other research conducted by the Bureau of Insurance, the Commission has identified the following commercial liability lines and subclassifications for which competition may not be an effective regulator of rates. These lines and subclassifications were not separately designated as potentially noncompetitive in the Commission's 1987 report to the General Assembly.

• Asbestos Abatement Contractors Liability
• Dams (existence hazard) Liability
• Detective or Investigative Agencies Liability (private)
• Gas Companies Liability
• Landfill Liability
• Public Officials Errors and Omissions Liability
• Rental Stores (machinery or equipment) Liability
• School Board Errors and Omissions Liability
• Security and Alarm Systems Installation Liability
• Security Guards Liability
• Sewage Treatment Plants Liability
• Underground Storage Tanks Liability
• Volunteer Fire Departments and Rescue Squads Liability
• Water Treatment Plants Liability

In view of the questionable accuracy of the 1988 supplemental reports, and after considering the results of the current surveys, the Commission has also designated as potentially noncompetitive the same lines and subclassifications that were designated in the 1987 report to the General Assembly.

Results of the following independent studies conducted on a .countrywide basis tend to supplement and support the conclusions developed from Bureau surveys:

• The united States General Accounting Office Insurance Study revealed an overall increase in availability and affordability in 1988. Although premium increases in 1986 were relatively large, insurance costs remained a small proportion of annual gross receipts. Given this small percentage, it was deemed unlikely that (1) increased insurance costs could have had a great effect on the cost of goods and services or (2) the viability of the organizations was threatened.

• The Goldman Sachs Insurance Rate Survey, conducted by an independent investment research firm, concluded that premiums are not rising fast enough to keep up with costs of claims and, consequently, loss ratios are headed significantly higher.

• Standard and Poor's composite average of stocks demonstrated that the property and casualty insurance industry has not earned excessive profits relative to other sectors of the economy. This finding was supported by a Value Line report (which focused on a number of specific' property and casualty insurers) as well as a study by the American Academy of Actuaries.

Another independent study, published by the Palmer Bellevue Corporation, concluded that open competition, rather than prior approval regulation, tends to result in higher pure loss ratios and, therefore, greater value for insureds.

Currently under development by the Bureau of Insurance is a program to assist consumers in locating insurance companies seeking to write coverages where the consumer has encountered an availability problem. This program will be in the form of an information and referral system developed from market research conducted by Bureau personnel.

To provide for a dialogue between regulators and insurance consumers, consumer advisory committees will be established and public hearings will be conducted throughout the state on a regular basis.

In October, 1988, the Commission recommended to the General Assembly's Joint Subcommittee studying insurance issues that the Code of Virginia be amended to prohibit rate service organizations from filing final rates, which include average expense factors, on behalf of their member companies. The result of this change would be to require each insurer to add its own expense component to the loss cost data provided by the rate service organization and file its own final rates. It is anticipated that this change will serve to enhance competition in the commercial liability lines and subclassifications where final rates are currently developed and filed by rate service organizations.

Approximately 25 Bureau staff members were involved in surveys and other research related to this project. The areas of expertise of these individuals include all facets of property and casualty insurance, insurance law, and regulatory procedures. Input was also obtained from experts in actuarial science and economics.

The standards enumerated in Section 38.2-1905.1 of the Code of Virginia were applied to the accumulated survey data to determine whether there is reasonable cause to designate a particular line or subclassification as potentially noncompetitive.

Based upon the information developed by the comprehensive surveys conducted by the Bureau of Insurance, and due to the questionable accuracy of the data developed by the 1988 supplemental reports, the Commission has reasonable cause to believe that competition may not be an effective regulator of rates for the following lines and subclassifications of commercial liability insurance:

• Architects and Engineers Professional Liability
• Asbestos Abatement Contractors Liability
• Commercial Contractors Liability (approximately 100 subclassifications)
• Dams (existence hazard) Liability
• Day Care Liability
• Detective or Investigative Agencies Liability (private)
• Directors and Officers Liability
• Environmental Impairment Liability
• Gas Companies Liability
• Insurance Agents Professional Liability
• Landfill Liability
• Law Enforcement Agencies Liability
• Lawyers Professional Liability
• Liquor Liability
• Medical Professional Liability
• Municipal Liability
• Pest Control Liability
• Products and Completed Operations Liability (approximately 1000 subclassifications)
•.Public Housing Liability
• Public Officials Errors and Omissions Liability
• Real Estate Agents Professional Liability
• Recreational Liability (approximately 200 subclassifications)
• Rental Stores Liability (machinery or equipment)
• School Board Errors and Omissions Liability
• School Divisions Liability
• Security and Alarm Systems Installation Liability
• Security Guards Liability
• Sewage Treatment Plants Liability
• Underground Storage Tanks Liability
• Volunteer Fire Departments and Rescue Squads Liability
• Water Treatment Plants Liability

These lines and classifications include the 17 which were designated in last year's report as well as 14 additional classes identified from this year's survey data and represent more than 1,300 individual subclassifications and types of coverages.

For the lines and subclassifications not listed, survey data indicates that competition is active and is an effective regulator of rates. The generally competitive lines and subclassifications include most habitational classes (apartments and rental housing), retail and wholesale establishments, service businesses and processing risks, as well as many professional liability lines.

Insurers writing commercial liability lines and subclassifications designated as potentially noncompetitive will be required to file, on or before May 1, 1989, supplemental reports for further investigation and hearings by the State Corporation Commission.