The insurance market is always cycling between hard and soft. As it continues to firm, employers will have fewer low-price options.
Expect your broker to communicate with you regarding what’s coming up, with respect to firming prices, says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. In this type of environment — even if it’s not a typical market turn — employers have to take the initiative.
“Business owners need to proactively work to eliminate risk by putting in place policies and procedures that need to be formally written down and followed,” he says.
Smart Business spoke with McTeague about how employers can react to the hardening market and future premium increases.
What’s the difference between a soft and hard insurance market?
In a soft market, insurance companies are looking to gain market share and grow, as they take on more risk at lower prices. This is good for the insured to a point because there are a lot of options. However, it’s called a cycle for a reason, and that soft market tends to quickly change — and competitive insurance options dry up. As insurance companies have taken on more underpriced risk, they start to get bad results, which eats away at their surplus and they start to pull back. This turn is usually predicated after a catastrophe such as the 9/11 terrorist attack.
What are the conditions of the current market?
Rather than just one catastrophe, the turn that’s beginning now is more because of a series of weather events such as tornados in Tuscaloosa and Joplin, flooding in Thailand, the earthquake in Japan and Colorado wildfires. These property-driven stresses on the market have hurt insurers and pricing is starting to firm.
In the past, the insurance market turned on a dime from soft to hard — all rates across the board. In this market, you’re seeing some price increases, but not for all insurance types. Property and workers’ compensation premiums have gone up, while liability and vehicle rates have stayed pretty even. This is not a classic market turn yet, but brokers keep hearing the word ‘yet.’ Insurance companies’ base portfolios are not making a whole lot, so they will eventually have to make up the difference with larger premium increases or covering less risk. However, this year — so far — has been a fairly friendly weather catastrophe year, keeping the turn slow.
For the insured that have high loss ratios, insurance companies are hitting those businesses hard with premium increases or non-renewing their policies. In these cases, it could be hard to find replacement insurance. However, the best of the best are still being treated well — the businesses that have low loss ratios.
Have some industries been hit harder because of the unevenness of the market turn?
Yes. If, for example, you’re a property manager who manages apartment buildings or commercial office buildings, you’re probably going to be hit harder. Other industries that rely more on liability and vehicle insurance may not see as much change. Regardless of the industry, make sure your loss control program is up to date and follow any risk management recommendations from your insurance company or broker. You also may need to increase deductibles or further spread your risk.
How can you combat the harder market?
Business owners need to do what’s necessary to become the best of the best. Put policies and procedures in place to mitigate your risk and decrease losses. For example, employers can utilize systems like Fleet Watch, which monitors drivers and vehicle usage by keeping track of factors like driver’s speed to give business owners real fleet data. Employers can drill down, find risks and eliminate them to keep rates down.
Employers should use data provided by their broker to reach the right decisions, such as asking whether raising deductibles or stop loss limits will be economically smart strategy or just make your underwriter feel better.
A good broker will help analyze everything from your current vendor/client contracts to previous losses. You might see risks that you didn’t know about. For instance, there could be a better way to create a contract so you push the risk out to a subcontractor.
Communicate with your broker on a regular basis. Brokers typically have a stewardship meeting well before the renewal to go over each of your policies and formulate a strategy for the renewal. If your renewal includes diminished coverage or added exclusions, then it may simply be a matter of pushback. You and your broker might tell your insurance company that if this is to be done, then something will be needed in return, while being prepared to look elsewhere. A proactive broker will handle these negotiations for you.
What about using self-insurance in this type of market?
You’ve got to analyze the situation thoroughly. There’s always going to be self-retention that makes sense, but it’s important to figure out where. For any self-insured program it’s a matter of rolling the dice, and your company has to have information to put the odds in your favor.
Combatting this market cycle is about consistent loss control and having a strong business model. Too many businesses fly by the seat their pants when it comes to preventing losses. A little dose of long-term thinking combined with a professional insurance broker goes a long way in helping you navigate through the hard and soft market cycles.
Marc McTeague is president of Best Hoovler McTeague Insurance Services, a member of the SeibertKeck Group. Reach him at (614) 246-RISK or firstname.lastname@example.org.
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