Navigating a ‘Firming’ Insurance Market
It may not seem true, but the last 20 years have been pretty good for insurance buyers. Insurance premiums were relatively low, and coverage was readily available. Those days where you could simply rely on your broker and carrier relationships are long gone. In a treacherous market, the almighty dollar trumps decade long relationships, golfing buddies and in some cases, your own blood.
Since 2016, the insurance market has sustained billions in losses year-over-year due to natural catastrophes, cyber-related events and unprecedented judgements in lawsuits, among others. In addition to the loss experience, the investment income has also had some dampening impacts. While the industry isn’t quite ready to officially label this a ‘hard’ market…we’re definitely in a ‘firming’ one.
So, what does a ‘firming’ market mean? The short and dirty of it is, insurance underwriters are under tremendous pressure to become more profitable. To do this, they are being pickier about the type and size of risks they want to take on. Because this happening across the insurance market, in all lines of insurance, they can charge you more premium without fear of competitive pricing. Why? Because that’s how a hard market works; as losses surpass earnings, underwriting requirements tighten and premiums go up. Carriers that wrote your business in the past may no longer have the appetite, or capacity, to cover you moving forward.
Even if your organization has historically had a good (minimal) loss record, that’s not enough. The good news is, carriers are starting to value Enterprise Risk Management techniques. Rolling up your sleeves and understanding what goes on in the trenches is paying off.
Generally speaking, insurance professionals don’t take the time to understand what makes your company unique and different from your competitors. Rather, they provide benchmarking data on what ‘companies like you’ (industry and size) are doing. Ask yourself this, are you a better risk than your competition? Pending your answer, that’s how you should expect to be treated.
Now more than ever is the time to dive into what makes your organization tick. In order to combat the changing insurance market, you need to sell your organization by showing how and why you are a better risk. So how do you do just this?
Here are a few tips that’ll give you a good jump start;
1. Review Your Risk Appetite – talk with your CFO and determine how big of a loss your company could reasonably sustain in any given month and/or year. If your company has stable cash flow and a strong balance sheet, your appetite is generally far greater and should be reflected in the way you go about purchasing insurance.
Take automobile insurance for example; is your auto premium derived from the size of your fleet or the actual miles driven? If the number of vehicles in your fleet is substantial, the carrier is more than likely comparing you against other large fleet industries (i.e. long-haul trucks). Ratings for miles driven are typically more favorable than ratings per fleet size.
We are not aware of any state law that would impact your right to self-insure your comprehensive and collision coverage. If there are restrictions on this, it may be in your loan agreements or your revolving credit agreements. What does your loss history look like? What is the replacement cost for your vehicles, and does it make sense to carry a low per-vehicle deductible versus assuming the risk and paying $35,000 to replace that rare lost vehicle?
On the liability side of the picture, taking higher deductibles or self-insurance retentions are good considerations to mitigate the continuing rate increases in the insurance market. Carriers like it when you have some skin in the game.
2. Safety Policies & Procedures – the dollars saved by increasing your retention levels can be used, partially or wholly, to revamp your safety program. Taking the time to ensure you have a robust and active safety program is not only a good selling point to underwriters, but it will help you mitigate and manage your losses.
3. Claims Management – a well-managed claims program leads to less frequency and/or severity of claims, which equates to lower premium. ‘My broker (or carrier) handles that’…and they do. To an extent. In my experience, I mainly see brokers/carriers ‘manage’ claims by ensuring they don’t go above your retention levels. Because if it does, then their money comes into play. Too often this responsibility is overlooked, and losses go unchecked. Have someone, other than the broker/carrier, manage your entire claims process.
As we continue this ‘firming’ market into 2021, insureds will have to get creative in managing their total cost of risk. The blinders are off and managing risk is no longer as simple as buying insurance. Risk doesn’t run vertically, it runs horizontally; decisions in one department (finance) can impact another (operations). It is all about understanding change, identifying risks and linking them to your business model so that you can be confident that you’re effectively managing your total cost of risk.