What’s in store for your commercial insurance renewal in 2016?

With political uncertainty and stock market declines, CEOs and CFOs are wondering how these factors will affect their risk management costs and ability to secure competitive insurance options.

“The good news is that insurance companies are doing relatively well, despite the economy and stock market,” says Marshall Wunderlich, area president of Arthur J. Gallagher & Co. “They haven’t been hit with as many catastrophic losses as they priced for.”

And when insurance companies profit, that means competitive pressures should lead to premium decreases for customers.

Smart Business spoke with Wunderlich about trends in the property and casualty markets that employers should be aware of.

What can business owners expect for their 2016 property and casualty (P&C) insurance renewals?

In general, 2016 will be a year of flat or reduced premiums for many lines of insurance coverage in the P&C marketplace. The drive for market share amongst both the national and regional carriers will continue to create competitive rates and capacity in the coming year.

Unless you have sustained multiple years of poor loss experience; have significant catastrophic exposures in areas such as Florida or California; or your industry is driven by emerging exposures and claims experience like cyber or professional liability, you can anticipate competitive renewal terms and pricing. Some risks could see reducations as much as 10 to 15 percentage point in risk transfer costs.

However, just because the news is good, don’t stop positioning your organization for an improving risk profile with a better safety and wellness culture.

Does that mean we’re still in a soft market?

The market has been a buyer’s market, or soft market, for the past 10 years, with just a few spikes along the way. Last year was fairly flat. This year is going to be softer with more decreases, in general.

Small ups and downs are the new normal. There is a school of thought that hard and soft markets of any magnitude are over. Instead, it will be pockets of hard and soft markets, depending upon the exposure and how much capital is chasing that exposure.

Insurance companies have gotten smarter at how they price. This creates a more efficient market, which might only be disrupted by a huge upheaval like the Affordable Care Act on medical insurance.

An efficient market won’t help you bend your cost trend over the next five years. Instead, you’ll need to change how you buy, and how you think about risk.

How have insurance companies helped create a more efficient market?

Over the past decade, most insurance companies have become more reliant and invested in using analytics on the property side. They’ve tried to improve their models to predict — based on historical losses, construction, weather patterns, etc. — what they think is going to happen and how they should structure their quotes. That trend has expanded to the casualty and cyber side of insurance. Data is being mined more aggressively in all lines of business, and carriers’ reliance is growing monthly.

The disparity also is increasing between insurance companies that rely on predictive modeling and big data analytics tools, and those that underwrite the traditional way. In the next two to five years, this could really affect the market, especially if insurers that aggressively use predictive modeling tools begin to see a return on their investment.

Imagine that insurance company X invests millions into putting its historical information through algorithms. Then, it applies this data to a specific risk, and based on its confidence in the science, the insurer slashes the price, doubles the coverage and guarantees the rate for five years. By putting boundaries around its underwriting process, through predictive modeling, in theory the insurer can make better bets, streamline decision-making and operate with a lean staff.

It’s too soon to tell how much modeling is impacting profitability — the tools are not yet fully validated. The impact may be immense … or it could be the next Y2K. Time will tell.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.