“When Bennett Steel Inc., a small construction firm based here, went to renew its insurance coverage shortly after Sept. 11, President Dave Bennett got a shock. The total bill shot up more than $185,000 from a year earlier because of higher premiums for various policies: a 122% increase in umbrella-liability rates, 66% more for liability at job sites, and 51% more for vehicle coverage,” writes Christopher Oster in today’s Wall Street Journal.

“Already dealing with the impact of the economic slowdown, Mr. Bennett increased the number of employees he was planning to lay off, to 15, or 10% of his work force.”

“Businesses across the country have been forced to make similar adjustments in recent months as they confront rate increases of 100% or more on their insurance premiums. And that threatens to damp job growth at smaller businesses — which traditionally create most of the nation’s new jobs — and thus possibly slow the economic recovery.”

“Insurers point to the estimated $50 billion in claims from the Sept. 11 attacks as a big reason for the rate increases. But Mr. Bennett and other business owners strain to see the connection. ‘It just doesn’t make sense that it would hit us like that,’ Mr. Bennett says.”

“He’s right. The higher premiums many small and midsize businesses hundreds of miles from New York City now face are the legacy of a decade of imprudence among insurers — a period that combined a relentless price war with aggressive risk-taking. From 1993 to 2000, underwriters slashed rates, sometimes as much as 40%, and fought for customers by loosening terms on all types of business policies — from directors-and-officers’ liability coverage to medical-malpractice packages to workers’ compensation insurance. For many businesses, that meant a boost to already-growing profits in a strong economy. (Rates for consumers dropped in the ’90s, too, and have been rising lately, but the swings haven’t been nearly as pronounced because of closer regulatory scrutiny.)”

“Insurers eventually reached the limit. By 1999, they were paying out, on average, $1.07 in claims and related expenses for every $1 of premium received on business coverage. During the bull market of the ’90s, insurers could sustain these losses on underwriting because the shortfalls were more than offset by investment income the insurers earned on premiums.”

“Now financial markets have soured, and so have insurers’ investment yields. The companies have also been hurt because claims on the cheap policies they wrote in recent years have come in much higher than they originally estimated — optimistically, in the eyes of some critics. And all this was happening before Sept. 11. Some insurers haven’t survived it all. And others are paying a steep price: For the fourth quarter, more than three dozen insurers reported a total of $5.4 billion in charges, mostly related to restructuring or boosting the amount of money set aside to cover claims beyond the impact of Sept. 11.”

“This mass action is an ‘industrywide confessional and rush to atone’ for the aggressive practices of the ’90s, says Alice Schroeder, a property-casualty insurance analyst with Morgan Stanley.”