Hard times ahead for the insurance market

Many business owners are anticipating a reduction in insurance rates as a result of a slowdown in business brought on by COVID-19. However, rates are actually increasing across the board.

“Current events have certainly exacerbated the problem, but this trend started prior to the pandemic,” says Chas Lowe, Commercial Insurance Specialist at Zito Insurance Agency. “Rates are going up indiscriminately, and that extends to nearly every line of business.”

Smart Business spoke with Lowe about why rates are increasing and how to gain a cost-of-risk advantage.

Why are premiums increasing?

On a macro level, one of the biggest factors is the current low-interest rate environment. Insurance companies invest a portion of the premiums they receive into interest-sensitive assets — bonds, CDs, Treasury bills — to gain a return. As the interest earned declines, it has a direct effect on the carriers’ profitability and forces them to look for ways to increase revenue (i.e. increase rates).

Also contributing to these increases is the proliferation of the so-called ‘nuclear verdict,’ in which juries award massive amounts to a plaintiff. This phenomenon emerged from years of corporate mistrust, significant growth in litigation financing and a shift in jury sentiment favoring plaintiffs. These disproportionate settlements are threatening the financial viability of insurance companies and will put pressure on rates for years to come.

What is the impact of rising rates on businesses?

Due to the current operating environment, insurance companies are narrowing their appetite for the types of businesses they’ll insure, along with which industries they’ll cater to moving forward.

Companies with large fleets of vehicles are being hit the hardest, as insurers are incurring huge losses due to distracted driving, higher vehicle repair costs and the skyrocketing cost of medical care. According to the Insurance Information Institute, this had led to the average accident more than quadrupling in costs over the past 10 years, naturally leading to an increase in premiums.

Is there anything a company can do to help stem increases in its insurance premium?

Becoming best in class within your industry by proactively implementing loss control and risk management resources will help to set your organization apart from your competitors and allow your broker to negotiate the best possible pricing on your behalf. To become a better insurance risk in the eyes of an underwriter:

  • Provide management training on employment related matters to decrease the likelihood of a lawsuit.
  • Review contracts to ensure you aren’t being held to undue liability your organization may not be aware of.
  • Upgrade your IT systems, reinforce your firewall and have IT stay on top of the latest safeguards. Train employees on the basics, such as not clicking on phishing links and securing laptops and smart devices.
  • Train employees on safe driving and install telematic devices in vehicles to identify irregular driving behavior.

Work with your broker to see what other resources/tools may be available that can be used to help make your workplace a safer environment for all those involved.

Are there alternatives for businesses to traditional insurance?

There is no right or wrong way to buy insurance and, depending on your organization’s risk tolerance, there are alternative ways to finance risk. A safety dividend program has more risk up front, but if other companies in that program perform well, you get premiums returned to you in the form of ‘safety dividends.’ You can also set up a captive insurance company, which you own and control. Or, depending on the size of your organization, you can self-insure a portion of risk, setting aside funds to pay any claims incurred.

With rate increases across the board, partner with an insurance adviser to identify areas where higher deductibles make sense and customize your policy to meet your organization’s business profile. An independent broker can help you find the right solution for your business’s unique needs.

Insights Business Insurance is brought to you by Zito Insurance Agency