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 [email protected].