A year ago we issued our special report, "Early Warning Signal: How You Can Survive The Coming Insurance Crisis". Armed with that report many insurance consumers weathered 2002's insurance storms. The bad new is the storms aren't over! Read this now to protect yourself from the perils of being unprepared …

In this Special Bulletin, we'll explain:

• Why 2003 promises continued rate hikes for insurance. Hopefully you've seen the worst, but you may get pounded again …
• What you can do to save money … without sacrificing the protection of your business, your family and yourself.

4 Real World Economic Knock-Out Punches 2002 In Review

Most insurance consumers, especially businesses, were at a minimum frustrated, and in some cases devastated, by dramatic rate increases, difficulty obtaining insurance and worrisome delays getting their insurance coverage placed in 2002.

4 primary economic factors we reported last year created this situation …

1. After years of paying out more in claims than they were receiving in premium, insurance companies made dramatic adjustments to their rates to begin reversing that trend.
2. Similarly, after years of highly profitable investing, the stock market downturn in 2000 and 2001 significantly reduced investment income, putting further pressure on companies to increase revenue from the insurance side of their businesses.
3. The tragedy of the September 11, 2001 terrorist attacks, and the threat of additional catastrophic attacks around the world, called into question the future financial stability of the insurance industry in general.

4. The law of supply and demand further pressured prices upward as a continuing high demand for insurance was met with a reduced supply of insurance capital.

What's going to happen in 2003, and how will it affect you?

4 Relentless Economic Pressures
Guaranteed To Continue Insurance Price Increases In 2003
(And Maybe For Several Years To Come)

The bad news is insurance rates will continue increasing through 2003. The good news is the increases shouldn't be as high as those in 2002. However, some lines of business and some professions and industries are in for another shock in 2003.

Relentless Pressure #1: Is There Any End In Sight To The Stock Market Downturn?

At the time of this writing the DOW Jones Industrial Average is down more than 10% in 2002 - the 3rd down year in a row. Whether or not a recovery has begun, as some analysts suggest, remains to be seen. The fact is insurance companies didn't make much investment income in 2002 … again.

In the 1990's insurance companies made money by investing their cash reserves. This relatively high investment income led companies to price their insurance very low. So low, in fact, that on average they were paying out $1.12 in claims and expenses for every $1.00 they collected in premium … actually losing money! But making it up, and then some, with their investments.

Unfortunately, the investing gravy train came to a screeching halt in 2000 and 2001. Companies started raising prices to compensate for reduced investment income. With the stock market trend continuing downward through 2002, the rate increase trend going forward will continue, too.

Relentless Pressure #2: There's More To Overcome Than Just Lost Investment Income

Insurance can be quite complex, but at its most basic level it's really quite simple. The insurance company must collect more money in premium than it pays out in losses (claims), and still have enough left over to pay expenses (like payroll, buildings, office equipment, etc.).

The problem is claim costs are escalating dramatically. They're outpacing price increases like a mouse that can outrun the cat that's chasing it. Time for a faster cat! For insurance companies that means continued price increases to keep up with, and hopefully catch, skyrocketing claims costs.

What's driving up claim costs? One area to blame is the out-of-control legal system we have in the U.S. - frivolous lawsuits, huge settlements awarded, and massive legal fees drive up claim costs year after year. There's also the rising cost of catastrophes, environmental hazards and overall inflationary pressures in the trades that service the insurance industry.

This is, of course, an on-going battle insurance companies have always fought. Unfortunately, the companies have allowed other factors to put them behind in this battle, and now they're playing catch up. In some areas, even with the recent increases, insurance prices are only matching those from 1992. That means continued price increases for you.

Relentless Pressure #3: The Law Of Supply And Demand Applies To Insurance, Too

We all know how supply and demand works around the holidays. Ten million kids are screaming for the newest fad, but somehow the manufacturer only managed to ship 8 million units for the holiday season. So, you pay $200 for something that will be $29.95 when the demand fades. The same concept applies to insurance, too.

Global insurance capacity (non life insurance), essentially the capital available to the industry, is down 22 - 25% over the past two years. Remember we're talking about a worldwide industry here … the World Trade Center disaster, terrible flooding in Europe, other natural disasters in the U.S. and around the world all contribute to the problem. In 2002, the U.S. market alone fell by $36 billion.

Combine this with economic factors like a 2 year down market in the U.S., Europe, Japan, etc. and poor profitability for insurance companies in general and there's a very low capital injection from the investment community.

So, the supply of capital is way down, investment capital is scarce, but the demand for insurance remains high. The result is rising prices.

Relentless Pressure #4: A Global Air Of Uncertainty

After September 11, 2001 the financial stability of the insurance industry was called into question. Not because it needed some fast money to pay for the World Trade Center- it had sufficient reserves for that. But, because the magnitude of the losses prompted the question, "Could the industry survive another catastrophe like that?"

Unfortunately, as you saw above, global insurance capacity continues to decrease. The industry must reverse this trend to able to withstand future tragedies the magnitude of the World Trade Center losses. The threat exists, and that's what insurance is all about - being prepared for potential future catastrophes.

Reinsurance companies provide insurance to the insurance companies you're familiar with, thus their actions directly influence the actions of your insurance company. Due to the factors we've mentioned and an uncertain future, they continue to restrict the risks they are willing to take and charge the insurance companies more for their reinsurance contracts. The insurance companies will continue to pass those increases on to you, the consumer.

Until industry reserves are restored to appropriate levels and the reinsurance companies are more comfortable with their ability to withstand an uncertain future, the upward pressure on prices will continue … definitely through 2003 and probably beyond.

3 Direct Impacts On YOU, Your Family And Business...

(The Unprepared Will Lose Money, Lose Protection - And Waste Time!)

Impact # 1: The price YOU pay for insurance is going up … period. Probably not as dramatically as in 2002, but going up nonetheless. The events explained above make this an unavoidable outcome. It's not a matter of if. It's a matter of when, how much and what you can do about it to cushion the blow. In personal lines insurance - personal auto, home, etc. - many companies filed rate increases during 2002 (lagging behind their business insurance focus in late 2001), and you'll feel the effect of those filings with your 2003 renewals, if you haven't already.

Generally speaking, personal lines increases will remain moderate. However, depending on where you are and who your company is you could see increases greater than 10%. Higher increases are especially possible for homeowners' insurance. Insurers are beginning to wake up to the fact that they've been losing money on homeowners' insurance. Some companies have stopped writing homeowners' insurance entirely in certain states.

The greatest price increases, however, will be applied to business insurance again in 2003. But its worth saying again that it shouldn't be as bad as 2002. However, there will be exceptions!

Habitational risks (rental properties, apartment buildings, etc.), medical malpractice, directors and officers liability are among those likely to see significant increases again. And nothing can be ruled out depending on the overall risk experience of your industry and of your business in particular.

Impact #2: In 2002, some businesses saw the availability of insurance become quite scarce … if they could get it at all … due to the historically poor performance of their industry as it relates to loss experience.

Companies abandoned lines of business they felt they could not insure profitably.

Most of those decisions were probably made in 2002. However, again you cannot rule out the possibility of insurance being unavailable to you in 2003 as companies continue to weed out their unprofitable business. If you previously got your insurance in a standard market, tighter underwriting may now force you to shop "non-standard" markets.

Impact #3: Everything is going to take longer.

Continued rate increases mean more consumers will be shopping their insurance. Continued tight underwriting means lengthy review and approval time at the companies. Your agent will be shopping more - not just for you, but for all his/her clients.

21 Things You Can Do
To Get The Protection You Need For Your Family & Business…
And Help You Save Money

1. If practical, use only one agent/broker for all your insurance business. Consolidate all of your family's insurance with one agent. If you own a business, consolidate your business insurance with one agent. This way you'll have someone who understands your entire needs and can get you full protection.

2. Use an expert. Most families and most businesses are underinsured - and don't know it until tragedy strikes. Engage the services of an agent who will advocate for your complete protection - and who understands the complex and differing needs of different people and different businesses.

3. Your agent should have access to several alternative markets to shop the account when necessary.

4. Cooperate fully with your agent. This is not the year to put-off phone calls and wait until the last minute. The insurance underwriters are going to be reviewing everything, and that's going to create a work backlog. Wait until the last minute and you may find yourself with no insurance at all!

5. Provide all information your agent needs as quickly as possible, and make sure he/she has your e-mail address and fax number for fast communication.

6. Know the company you are insured with. What is their financial condition? Make sure your agent places your business with a financially stable company. Discuss this with your agent. (We're predicting the decline of many insurance companies in the coming turbulent period.)

7. Once you have a professional agent and insurance company you trust, stick with them for the long term. Moving an account every year or two to save a few hundred, or even a few thousand, dollars can be counterproductive during times like this. Insurance is a relationship business and loyal customers have more bargaining power with trusted business partners than those who shop their accounts routinely.

8. Business owners: comply with recommendations from company engineers and loss control. Remember all the things the loss control department has been asking you to do for years … to improve safety and reduce risk? If you haven't done them, yet, do them now!

9. Voluntarily take steps to eliminate hazardous conditions and create a safe environment any company would want to insure. And safeguard your property to reduce the risk of theft and damage.

10. Make a list of the actions you've taken to reduce your risk and have your agent use that list when negotiating your rates.

11. Minimize your claims. The businesses that will get the highest rate increases, or not be able to get insurance at all, will be those with frequent small losses or who ignored loss control recommendations.

12. Make sure any new equipment or buildings are installed or constructed in a manner desirable to the insurance company. Consult your agent and loss control before proceeding with construction or installation.

13. Make your insurance agent part of your trusted team of advisors - along with your attorney and accountant. Your agent is critical to your overall economic well-being. Your agent may be able to help you avoid unpleasant surprises.

14. Save money: increase your deductibles and retain more risk - most companies look favorably upon clients with higher deductibles. It shows you are willing to cover the small day-to-day stuff, and use your insurance for large losses - as it is intended. This will help lower your rates, too.

15. If possible, use higher coinsurance formulas to help lower rates.

16. Most individuals, families and business are under-insured! Do a thorough review of your coverages to make sure you have insurance in place for exposures that are critical to the survival of your business, and to eliminate any that are no longer needed.

17. If you absolutely must lower your costs, you may want to temporarily suspend "non-critical" coverages. Of course, you would be retaining the risk of loss yourself in this case. Make sure you fully discuss this with your agent.

18. Be sure your insurance is providing proper coverage amounts. You may be dangerously underinsured in some instances, or paying for coverage you don't need in others.

19. Employ non-insurance risk management techniques where availability of coverage is an issue and/or to reduce your cost of insurance.

20. Small business owners should ask what special programs and discounts might be available to them.

21. Whenever possible, business owners should place their entire business insurance package with one insurance company. Package policies are almost always cheaper than spreading insurance coverages over several insurers. Also, you are less likely to have expensive coverage overlaps or, more importantly, coverage gaps. Discuss this with your agent.

The dramatic conclusion…

• 2002 brought dramatic price increases and reduced availability as predicted. It's not over.
• 2003 should be "better" overall, but no one can predict the future. What events await that could deliver another crippling blow to the world economy and the insurance industry? Hopefully, none!
  
• Insurance will become a more important part of everyone's life. You'll be paying more. You'll be spending more time making sure you have the protection you need.You must make your agent a Trusted Advisor to your individual, family and/or business.
• Review the "Financial Stability Checklist" with your family and/or business associates.
• Discover what you can do to save money, save time - and get the protection you need.Do not delay. The saddest words an agent ever hears are "I never thought it could happen to me…"
• Ultimately, you're responsible for your own insurance buying decisions. Be a smart consumer.

For more information, contact the Manufacturers Insurance Resource Center or get a Quote to discover how you can avoid the insurance crisis outlined in th is special report.

Final note. The information in this report is based on the most current and complete information available today. The insurance industry has survived many crises before. Hopefully, insurance companies will explore and discover creative solutions to the problems predicted in this report. Whatever happens, your agent - and the other Charter Members of the Society - intend to help you make responsible consumer decisions about the protection of yourself, your family and/or your business. If you have any questions about the content of this report, contact your agent immediately.