Some current reports state that insurance prices are soft and commercial insurance is readily available. Is this a sign we have avoided an insurance crisis?
“No,” says Philip Glick, senior vice president of ECBM Insurance Brokers and Consultants. “It’s not a question of whether the insurance marketplace will become difficult but rather when the change will take place and how severe the increase.”
As a result of several large hurricane losses, significant investment losses incurred by many insurance companies and an overall increase in total claims experience, most major insurance companies are reporting losses or have seen their profits reduced significantly this year, he says. To correct this situation, insurance companies will have to increase premiums, cut expenses or, most likely, both.
Smart Business spoke with Glick about how an insurance crisis may affect your business and the steps to take now to protect it.
What does an insurance crisis mean for your company?
Insurance premiums will undoubtedly increase beginning next year and many of the broad coverage extensions that insurance companies have been offering at little or no price will be pulled back. Insurance consumers are used to seeing their premiums drop each year even if not justified by lower claims. Such ‘freebies’ will be ending. For some industries, such as construction or trucking, the ability to get adequate insurance at an affordable cost may be more difficult.
There is also a hidden cost increase likely to come of which consumers should be aware. As insurance company profits decline, they may slow down the payment of claims and become more difficult to deal with in the adjustment of most claims.
The news is not bad for everyone. Buyers who control losses and have good claims experience will do far better than those who have not paid attention to their underlying losses in the past few years.
What actions should business owners consider?
The single most important thing is to take steps now to evaluate the risks of your business, including property, liability and workers’ compensation exposures. Then take all reasonable steps through safety and loss control procedures to eliminate or mitigate the potential for losses.
It is also important to establish aggressive claims management procedures, including prompt investigation of any losses that happen, careful review of the appropriateness of insurance company reserves, and aggressive plans to defend and settle liability claims. Careful management of workers’ compensation losses, and careful settlement and adjustment of any property claims will become very important.
Purchasing insurance from strong, stable insurance companies is critical. This does not necessarily mean leaving your current insurance company — but have a backup plan ready. One specific approach is to obtain a standby quote from another insurance company with the agreement that the insurance company will keep this alternative quote open for an extended period of time, possibly through the expiration date of your current policies. Your company would then be covered in the event there should be a rating drop or sale or other change of control of your current insurance company.
How can you cut costs now to prepare for premium hikes in the future?
Increase insurance deductibles so that you pay for routine smaller losses directly out of pocket. When insurance markets are very competitive, low deductibles are not as costly. As prices increase, insurance companies will charge significantly more than the out-of-pocket costs to transfer small routine claims to them. Paying minor claims out of pocket will also improve a company’s overall claims experience when viewed by an underwriter.
We also recommend that, while costs are low, companies purchase additional limits of necessary coverage or new policies now rather than waiting to make these changes later when costs may be higher. This may include increasing limits of directors and officers liability coverage, purchasing higher limits of umbrella coverage, and upgrading limits of property or business income coverages now to more adequately cover your risks.
Another approach to consider is working with your current insurance company to consider doing an extension of your current policies at current premium rates and terms and conditions. This would let you lock in current favorable rates for another six to 12 months.
How can business owners manage this process proactively?
Look at your company the way insurance underwriters and loss control consultants view it. Although most insurance buyers put tremendous attention on bidding out their insurance premiums, on average 65 to 70 percent of your premiums are directly related to actual claims. Taking all reasonable steps to reduce your claims experience is the best way to manage insurance costs over time.
As markets tighten, medium- to large-size companies should also consider alternative risk financing approaches, such as large deductibles, retrospective rating, and captive insurance company options for workers’ compensation and liability insurance risks. While these programs can be effective ways to reduce insurance costs, they all represent long-term commitments by the buyer.