A changing market Featured

7:00pm EDT January 29, 2008

The soft insurance market, a time when premiums for most types of business insurance are falling or at least holding steady, is here. Now is the time to make the most of the soft insurance market and take advantage of the opportunities it presents.

“A soft insurance market presents a real opportunity for business owners,” says Dina Daniele, CPCU, vice president at The Graham Company. “If you play your cards right, you can obtain significant cost savings during a time like this. The trick is to be sure that you aren’t giving up any coverage when you move to less expensive insurance products.”

Smart Business asked Daniele for more ways to capitalize on the current state of the insurance market.

What is the soft market and what causes it?

A ‘soft’ insurance market means that insurance premiums are going down. It is driven by a number of economic factors and is cyclical in nature. Soft markets usually come five to six years after insurance premiums reach their peak. The last peak occurred in 2002, following the events of the terrorist attacks on Sept. 11. Insurance companies increased their rates to adjust for their $20 billion in losses as a result of the attacks, as well as the reduction in investment income they were experiencing. These events were followed in 2005 by the most expensive insurance catastrophe in history, hurricanes Katrina, Wilma and Rita. These three storms caused more than $55 billion in insured losses. In response to this natural disaster, insurance companies further increase premiums.

Now we’ve gone a couple of years without a major insured catastrophe, and insurance company profits are reaching all time highs. In addition, in response to the increased cost of insurance, many businesses sought out alternative risk financing mechanisms, including captive insurance companies and self insurance. The combination of soaring insurance company profits (which increases supply) and the reduced demand for traditional insurance products has put a lot of pressure on competing insurance companies to lower their rates. The result of insurance companies lowering their premiums and competing for business is the soft insurance market.

What does this mean to business owners?

The soft market presents an opportunity for business owners to decrease their insurance costs. A savvy buyer will be able to decrease their costs without giving up coverage. The trick is to go about it in the right way. Insurance is a relationship business — insurance companies (and brokers) remember which customers treat them well and which ones switch every time they can save a few bucks. Although it’s a soft market now and premiums are falling, conditions will change in a few years. When costs are going up and coverage is harder to find, you want to have friends on your side. So, look to save some money, but do it in a way that allows you to keep the coverage you need and preserve key relationships.

How should owners take advantage of a soft market?

The first step we recommend is to go to your incumbent insurance carriers with your wish list. Working with your broker, come up with the list of things you would like to see at renewal. For example, you could ask your incumbent carriers to reduce your premiums by 10 percent, lower your deductible and give you coverage for a previously uncovered exposure (per location general aggregate limit, for example). You could suggest to your incumbent carriers that if they agree to the terms and conditions you propose, you will agree to renew with them. If not, then you will seek other alternatives. We like this approach because it allows your current insurance companies to partner with you and extend your relationship. It gives them a chance to keep you happy without having to fight tooth and nail in the open marketplace.

If the insurance company is not willing to help you achieve enough of your goals, then ask your broker to find competitive alternatives. In doing so, your broker will solicit proposals from several different insurance companies. This will really test the marketplace to see how much you can improve your current program. Take caution though — a cheap price does not necessarily equate to value. Be sure that your insurance broker thoroughly explains to you any differences in coverage.

Does this current market affect all types of business insurance?

To some extent, yes. Most insurance companies purchase re-insurance to help secure some of the risk they are taking. When one line of coverage gets hit hard (property insurance after a hurricane, for example), reinsurers will try to recoup their losses however they can, even if it means increasing rates in an unrelated line of coverage. In the current soft market, insurance rates are falling across all lines of coverage. The only exceptions are property insurance for coastal properties in hurricane-prone areas. The other exceptions are for companies that have poor loss experience. If you historically have a lot of claims, insurance companies will make you pay a premium. The better you can control your losses, the better you control your insurance costs and minimize the ups and downs of the insurance market.

DINA DANIELE, CPCU, is vice president at The Graham Company. Reach her at (215) 701-5314 or ddaniel@grahamco.com.