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Pricing in the product liability market is a mixed picture, with rate changes depending on loss history and plentiful capacity limiting increases.
“It's a market in transition right now,” said Vince Gaffigan, St. Louis-based senior vp, director of risk management for Lockton Cos. L.L.C. “No one is getting decreases” for product liability business.
Mr. Gaffigan said less risky products probably are seeing rate increases of 5% to 8%. For the riskier class, “you're seeing higher single-digit, low double-digit increases,” he said,
William Milaschewski, director of risk management for Boston-based Cabot Corp., said at the fine particle manufacturer's latest renewal in October, the market looked like it could be in “the beginning period of transition, and that's probably still going on at this point.”
“Part of it depends on what your loss experience is,” said Linda Pirlot, Walnut Creek, Calif.-based assistant risk manager for Del Monte Corp. “If you don't have a frequency problem or a severity problem,” rate hikes are “not going to be more than 5% or so.”
Robert J. Lala Jr., Chicago-based senior vp, primary casualty, for Liberty International Underwriters, a unit of Liberty Mutual Group Inc., said some of the product liability business that was written by the standard market “is now making its way back to the surplus lines market.
“As often happens when premiums start to increase, insureds look to carrying higher retentions,” he said. “Surplus lines insurers tend to like higher attachment points anyway.”
He said LIU rate increases have been 5% to 10%.
“It's obvious that the market has kind of bottomed out and (insurers) had to increase prices,” Mr. Lala said.
Still, there is “a lot of surplus in the market, which is helping to hold the prices down,” Mr. Gaffigan said.
Mike Stankard, Detroit-based managing director and industry and materials practice leader for Aon P.L.C. and its branded automotive practice leader, said although he is seeing insurers trying to raise rates, it is “being offset by so much capacity and so many alternative markets, I think it's going to be very difficult” to raise rates except for troubled accounts.
In addition, “there are strategies that brokers are using to minimize rate increases,” such as having four insurers split $100 million in capacity, Mr. Gaffigan said.
One oft-cited factor driving increased rates in the product liability market is legal costs.
Bob Nevins, Boston-based vp of product liability at Lexington Insurance Co., said legal expenses continue to escalate, so rate increases are necessary from a profitability standpoint.
“You're getting higher verdicts. You've got a very, very aggressive plaintiffs' bar, and there seems to be a new theory at least every day as to why manufacturers would be liable for an accident or injury,” said Peter Dion, Chicago-based director-product liability for Zurich Services Corp. “And you're seeing that reflected in settlements going up, and jury verdicts going up.”
“The cost of health care and the medical for the injured parties have all escalated” while rates have decreased for the past six years, said Mr. Lala.
“Now we're beginning that walk up the hill to get the premium commensurate with what the losses will be,” he said.
“As rates creep up,” said Mr. Gaffigan, markets that did not want “to chase pricing to the bottom” are starting to show more interest, thus increasing capacity.
With loss experience deteriorating, Lexington looks for at least 10 years of data to get a better picture of the account's experience. Product liability is long-tail insurance, so five to six years of loss experience does not give an underwriter sufficient information to set rates, Mr. Nevins said.
With greater underwriter scrutiny of such risks, “capacity's not being given away for those that don't deserve it,” said Mr. Milaschewski.
Where buyers needed to make their submissions 90 days in advance, they must now be submitted up to 120 days beforehand because insurers are asking more questions, making more documentation requests and probably asking for more meetings with their underwriters, Mr. Gaffigan said.
In addition, “there's a greater awareness on the part of buyers” who now “may be looking for higher limits,” Mr. Gaffigan said.
Mr. Gaffigan said particularly for consumer-oriented products, the big retailers are “starting to take a sharper look” at manufacturing quality assurance and compliance practices.
Large retailers are starting to place “a greater emphasis on making sure the people who supply their stores have adequate limits and adequate coverage and, more importantly, are taking the right steps in the manufacturing process to protect the consumer,” he said.
Pamela Ferrandino, New York-based casualty practice leader for Willis North America, pointed in particular to produce growers and said large chains are asking growers to purchase product liability insurance.
Large national chains are “looking to transfer the risk they would assume from selling the products as far down as they can,” because they “don't want to assume the liability for selling” them, she said.
The 2011 Food Safety Modernization Act also is affecting the market, said Mr. Dion. That law, a reaction to food recalls in 2009 and 2010, “is probably the most comprehensive food safety law enacted in the past 50 years,” he said.
The legislation's provisions include calling on food importers to certify that their supplies are safe and the hiring of 4,000 Food and Drug Administration inspectors to inspect foreign and domestic facilities, he said.
Emerging from the shadow of product liability coverage, growing usage by the food and beverages sector is expected to be among factors increasing demand for product recall insurance, observers say.