Ripple effect. (California Property Insurance Rates on the Rise).

Property and casualty insurance rates are skyrocketing across the country and the Golden State is no exception. California's businesses are feeling the ripple effects of the massive property damage at New York City's Ground Zero and the resulting shift in insurance practices. Coupled with a sagging economy and a dot-coin bust that hit California particularly hard, it's clear that the days of competitive property insurance rates are over--at least for awhile.

"Last year was a 'perfect storm' situation [for property insurance]," says Peter Moraga, spokesperson for the Insurance Information Network of California. "Now we're seeing some of those rippling effects."

DRAMATIC INCREASES

Homeowner property insurance rates in California saw modest 9 percent to 10 percent increases this year, while California's commercial property insurance carriers have bolted their prices at least 25 percent. And nationwide, property insurance rates are going up an average of 30 percent, according to industry reports.

While the homeowner insurance rate increases are due mainly to claims and litigation as a result of water damage that results in toxic molds in states like Texas and California, the commercial increases have a direct tie to Sept. 11.

"9/11 took a lot of money out of the capacity pool that commercial insurers need to pay claims," says Moraga. "And, after 9/11, reinsurers--the companies that insure insurance companies-took terrorism out of their contracts. When these contracts were up and renewed, those prices went up very high." This resulted in any large property that involves reinsurance--typically properties worth $50 million or more--getting socked with increases as high as 300 percent in some areas of the country.

"The closer you get to Ground Zero, that's where you're going to see the highest increases. In Manhattan--forget about it," says Moraga. "Out here on the opposite coast, we are far removed, but the fact is we re still the Golden State. There is a trickle-down effect that, to a certain extent, is dependent upon the type of business and its location."

LANDMARK AREAS FEEL THE HEAT

In concentrated urban areas such as San Francisco or Los Angeles, commercial property rates are higher than average and certain forms of coverage are no longer available-such as losses due to terrorist attacks. Officials at the Golden Gate Bridge report that the bridge no longer has terrorism coverage and that their insurance costs will more than double this year. And, some workers compensation carriers are charging a 5-percent terrorist surcharge to cover employees of companies working out of highrise buildings in downtown San Francisco.

California's landmarks, and the businesses that support them, or are located near them, are seeing the most dramatic hikes. "We have huge landmarks--the Golden Gate Bridge; the Coronado Bridge; the Terminal Island Bridge; and the TransAmerica building in San Francisco, airports ... all now are deemed [potential terrorist] targets," says Moraga.

RISI MANAGEMENT CAN CUT RATES

Fortunately, businesses are not helpless against rate increases. While some increases may be inevitable, companies can take preventative measures to mitigate risk.

By working with an insurance company's risk manager, businesses can make changes and reduce their property insurance rates. "We see a lot more interaction between insurance companies and their clients," says Moraga. "Risk management seems to be growing quite a bit."

Insurers' risk managers help clients assess all potential property liabilities for their business--from cleaning up floors and obstructions in pathways, to making sure sprinkler systems are in place that release a non-wet solution to extinguish fires, but do not damage computers.

Moraga notes that workplace violence and internal cyber crime also pose as huge risks that can inflate insurance costs. According to the U.S. Bureau of Justice Statistics, two million people are victims of violent crimes at work, and two-thirds of these incidents are preceded by behavioral red flags that might have been prevented. To counteract this phenomena, companies should identify current potential problems and institute procedures that ensure all candidates are thoroughly checked before hired. For a checklist of factors that may lead to workplace violence, go to www.calcpa.org/californiacpal/workplace.html.

Cyber policies that protect a business' e-environment also help to mitigate risk. "Because of today's bad economy, 60 percent to 70 percent of hacker attacks are being launched by disgruntled employees," says Moraga. "It is vital that businesses have programs in place that mitigate any ill feelings employees may have."

Companies should advocate a sophisticated Internet security program consisting of both personnel and programs, says Moraga. "Keep your virus protection up-to-date, have appropriate firewalls in place, change employee codes and passwords frequently--especially when employees leave the company."

PRICES TO STABILIZE, MARKET WILL ADJUST

Since Sept. 11 was the single biggest insurance catastrophe in the history of insurance, experts say that it is only natural that the marketplace adjusts to make up for it.

"Insurance is the business of assessing risk and putting a price on it," says Moraga. "But when you have a risk that before Sept. 11 wasn't even fathomable, then you have to change the way you do things. We saw it after the Northridge earthquake--there was an adjustment. Once the adjustment happens, prices will stabilize."

Experts note that premiums started creeping up in tandem with the Wall Street decline that began in 2000. For example, Conning and Company, a consulting company that researches the insurance industry, predicted an 8-percent to 15-percent rate increase well before Sept. 11.

"It wasn't just 9/11, but you had a period of time in which the market was very competitive and prices had been very steady," says Moraga. "Now you're seeing the double whammy of 9/11 plus the stock market going down--all of those things have an effect on insurance. But the rates would have gone up even if 9/11 hadn't happened."

A drop in prices is inevitable once the market stabilizes. In the meantime, California businesses can use this time proactively--as an opportunity to evaluate their property, mitigate risks and ride out the storm.

RELATED ARTICLE: MOST COSTLY INSURED U.S. DISASTERS

World Trade Center Collapse: $40 billion (estimate)

Hurricane Andrew: $15.5 billion

Northridge Earthquake: $12.5 billion

Hurricane Hugo: S4.2 billion

Hurricane Georges: $2.9 billion

Tropical Storm Allison: $2.5 billion

Hurricane Opal: $2.1 billion

20-state Winter Storm: $1.75 billion

Oakland Fire: $1.7 billion

Source: Insurance Services Office, Inc.

Deanna McCrary is a CalCPA editor and writer.