Whether you’re hunting for a home, car shopping, or you just really want those crab cakes, you likely understand that “the market” will impact the price of those items, and unfortunately, there’s not much you can do about it. The reality is there may not be a term that is more widely used, misunderstood, and appropriate when it comes to explaining the cost and availability of something you’re trying to buy than “the market.” The insurance industry is no different.
Chief Financial Officers (CFOs) far and wide have sat down for their annual renewal and been disappointed (sometimes even pleasantly surprised) with the results. Sure, with good communication, everyone involved should have an idea of how the insurance renewal will behave, but there is always that grey area that impacts your rates no matter what you do, even during past soft markets. Yep, the market.
What Is the Insurance Market?
Understanding the insurance market comes back to the basic mechanics of insurance.
People pay an insurance premium throughout the year in order to be made whole in the event they suffer a loss of their assets. Often, these losses are out of the control of the policyholder (think fire, tornado, flood).
The premiums paid by many policyholders go into one big bucket, which is largely where the money comes from to pay claims. Insurance companies hold these buckets, and they basically make money in two ways — premium paid by policyholders and investment income generated from those premiums. The latter is largely out of their control.
In times where the money being paid out from the bucket outweighs the money coming in, insurance carriers use the only lever they can to increase profit and maintain a necessary amount of money in the bucket to pay claims. They increase rates. This is known as a “hard market,” and businesses have been experiencing this for the last few years with no real end in sight.
There are many explanations as to why insurance companies are paying out more than ever for claims. Things like distracted driving, nuclear verdicts, catastrophic weather events, an ever-increasing litigious environment, and a global pandemic all play a very real role. No matter the explanation, insurance companies are driving hard to increase profitability — at your expense.
How Does the Market Impact Your Insurance Program?
There are some things you should be aware of when it comes to insurance renewals in a hard market:
Higher Rates and Premiums
This one is the most obvious. Each individual vehicle and square foot will likely cost more than the year before.
Increased Underwriting Scrutiny
While that outdated sprinkler system may have been overlooked in the past by your insurance company, now it could result in a non-renewal. Insurance carriers are getting pickier about risks they choose to insure.
In some cases, businesses that are higher hazard are being dropped altogether. Industries, like manufacturing, have experienced a significant shift in the number of companies willing to write their business, making it difficult to challenge a poor renewal. Simply put, there are fewer options.
Decreased Underwriting Capacity
All insurance companies have reinsurance treaties that dictate what they can insure and for how much. Lately, many insurers are not allowed to cover the same limits they once could. So, don’t be surprised if the company that wrote your $25 million Umbrella policy can now only offer $5 million (the bigger shock is that it may still cost the same!).
What Can You Do about Your Insurance Renewal?
While navigating a hard market can make for a tough renewal, it isn’t all doom and gloom. Below I’ve outlined some things you can do.
Communicate with Your Insurance Broker…EARLY
Get some early indications regarding your upcoming insurance renewal and what to expect. From there, develop a strategy together about approaching other carriers and deductible options, and discuss changes in your business. When is the last time your building values were updated? Based on the current lumber market, the cost to rebuild is much different than it was five years ago.
Separate Yourself
Underwriters review countless submissions each month, likely in your same industry. Beefing up internal risk management strategies, such as safety programs, claims handling strategies, and housekeeping at your facility, can make you stand out. Don’t be afraid to brag to your broker about the great things you’ve done. The more complete and detailed your broker’s submission, the better.
Explore Alternative Insurance Programs
The most effective way to have more control over your insurance cost is to take on some of the risk yourself. Programs, such as captives or other large deductible options, help you separate from the rest of the market, gain control, and retain a good amount of the premium you pay.
One thing is for certain, the insurance market is fluid, and it tends to move in cycles. The last thing anyone wants is to be surprised with bad news. Communication and having a broker to help guide you through this process and advocate on your behalf is key.
At Holmes Murphy, we have built our business around consulting with our clients to help achieve positive results and to approach challenges creatively. Each business is unique and should be treated as such, especially in the face of adversity. So, with all of that said, how can we help you? Simply reach out to us and let us know!
