A dynamic pricing cycle Featured

8:00pm EDT May 26, 2007

The insurance industry pricing cycle is dynamic in nature. Influenced by a number of factors, the pricing cycle alternates between periods of soft and hard market conditions. In a hard market, coverage is harder to place and premiums increase. In a soft market, premiums are stable or drop and coverage may be more readily available.

For buyers of commercial insurance, a soft market is certainly preferable. And with rates expected to decline in Detroit this year, it could be a good time to optimize risk transfer options.

As with all pricing cycles, this market trend won’t last, points out Jim Kapnick, president of Kapnick Insurance Group. “The rates will continue to decline in 2007; however, they are beginning to get to an unprofitable level, which may signal a stabilization of pricing in 2008 or 2009,” he says.

Smart Business spoke with Kapnick about the insurance pricing cycle, how a company can ensure they’re getting the best price and the importance of building a culture of safety.

What factors affect the insurance market cycle?

A variety of factors, including economic conditions, catastrophic events, insurers’ financial condition, and, ultimately, supply and demand.

How do pricing cycles vary by sector and geographic location?

Insurance companies are in the risk-taking business and do so with the plan of making a profit. They also have access to ‘real-time’ claims data and sophisticated claims modeling that allow them to make different pricing decisions based on types of coverages and location. For example, the pricing and underwriting approach for property coverage for businesses based in the southeastern United States will be much different than for businesses located in the Midwest.

What is the current climate for rates in the Detroit area?

A couple of years ago, the reinsurance market put pressure on primary insurers to balance their risk portfolio outside the hurricane coastal areas. They looked at areas of the Midwest, and primarily Michigan, as a key area to grow in order to diversify their exposures. As the insurance companies tried to claim market share, demand outpaced the supply and the rates began to tumble. This has been good news for businesses in Detroit that are seeing economically difficult times.

How long does an insurance market pricing cycle usually last?

In recent years, the pricing cycle has become more difficult to predict. The last soft market (decreasing pricing) lasted over 10 years; however, this was fueled by a strong economy, favorable interest rates and a transition of insurance carriers upgrading their legacy computer systems. Now, with the updated computer systems, insurance companies can quickly predict when they are making or losing money, which should bring the pricing cycles back to the normal three- to four-year period.

How can a company ensure it’s getting the best price?

While premiums vary due to market pressure, your true cost of price is determined by your claims history. The key to controlling price long-term is to prevent losses in the first place, manage claims efficiently when you have a loss and use cost containment strategies. Those who approach risk financing through sustained long-term cost control and claims management measures, not just to avoid a sudden upward turn in the marketplace prices, are always in a better position to secure coverage at the best possible price.

What types of strategies can be used to limit exposures?

It is always a good idea to take two steps back and do a self assessment regarding your exposures to loss. Change is constant in the business environment today and one must make it a habit to evaluate your processes and people on a routine basis. As new exposures are identified, then a decision can be made regarding how to properly control these exposures and make sure they are monitored into the future.

How can management build a culture of safety?

Like any successful initiative, it needs to come with the support and encouragement from the top. Not only is a ‘culture of safety’ good for the employees, but most importantly, it is a good business decision. If you reduce your claims, you will save money and add more dollars to the bottom line … plain and simple.

JIM KAPNICK is president of Kapnick Insurance Group. Reach him at (888) 263-4656 x1320 or Jim.Kapnick@kapnick.com. Kapnick Insurance Group is a member of Assurex Global, an international network of insurance and employee benefit brokers.