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 [email protected].
Kapnick Insurance Group is a member of Assurex Global, an
international network of insurance and employee benefit brokers.