Analysis – No plain sailing for insurers.

Football-loving accountants will have been alarmed at recent reports that next year’s World Cup is threatened by the possible withdrawal of the tournament’s insurance cover. And anyone planning a holiday would have been worried last month by the threats of airlines to ground their aircraft for the same reason.

Planes are still flying and it is unlikely the World Cup will be cancelled.

But these threats reflect the pain the business world is feeling over a sharp rise in premiums that the insurance industry is warning will be felt by almost all companies.

Pressure to cut costs has increased as the economy has faltered and accountants are spending hours poring over their spreadsheets, looking for areas where budgets can be trimmed. News of hefty rises in insurance premiums will therefore be even more unwelcome than usual. Yet large insurance company AXA last week warned it is increasing the cost of some of its business insurances by up to 80%.

AXA’s corporate solutions group, which covers risks for large companies across the world, says it had already intended to raise premiums before the terrorist attacks of 11 September, in order to restore the balance between increasing claims and years of falling premiums.

After the atrocities, the insurer has decided that even steeper rises are needed. Commercial property cover will rise by a minimum of 35%, and up to 80% are possible. Liability insurance will rise by up to 35%.

An AXA spokesman says that, although clients are obviously not happy about such steep increases in premiums, most understand the situation in the insurance market, where underwriters are being forced to raise premiums to stay in business.

In the wake of 11 September, all insurers are reviewing their rates, which in most cases were already rising sharply after years of low profits and rising claims. This makes it difficult for most customers to threaten to take their business elsewhere. Finance directors will have to look still harder at their budgets.

It’s not just those who work in transport, or who have high-rise offices in capital cities that will be hit. The New York tragedy will hit reinsurers – the insurers of the insurers – especially hard. Estimates of the worldwide insurance bill have been as high as #50bn, and fears about the financial stability of insurance companies have been raised.

Multimillion-pound pay-outs will eat into reinsurers’ capital reserves, meaning they will not be able to offer as much cover in the future. What cover they do offer will cost more – putting further pressure on premiums.

A spokesman for Lloyd’s of London says businesses which have overseas assets, especially in the Middle East, or which have staff who travel abroad frequently, will be particularly badly hit. But he also emphasises the knock-on effect that ordinary businesses will feel.

‘The shipping industry is facing greater insurance costs, so cargo costs rise, so goods go up in price,’ he says. ‘This will all feed through to businesses and eventually the man in the street.’

He also warns that, given the change in the world’s climate, insurers will be less willing to cover some risks. ‘When some businesses start reviewing their cover they will not be able to continue as they were,’ he says.

The Lloyd’s spokesman estimates that insurance premiums have risen by 20% or 30% since the beginning of the year. The events of 11 September could more than double this.

Insurance specialists are warning companies that they should start thinking about the situation now, rather than waiting for a nasty surprise when they come to renew their cover.

Mike Jones, head of UK retail placement team for broking giant Marsh, says companies should sit down with brokers and get a deeper understanding of their exposures. They should also ensure their risk management plans are up-to-date and effective, and consider alternative ways of covering risks, such as self-insurance or using hedging mechanisms via the capital markets.

Jones also warns that pricing isn’t the only issue. As well as making cuts, finance directors are also likely to have to cope with new restrictions on the range of insurance cover companies currently enjoy.

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