After eight years in a soft insurance market, a change may be coming. In hard markets, premiums increase dramatically. In soft markets, premiums decrease, creating more competition for businesses.
“There are always going to be highs and lows,” says Richard B. Hite, CEO of SeibertKeck Insurance Agency. “One thing you can count on is that the cycle will persist. There will be a time where prices increase, and you can’t control it, and there will be a time when prices decrease and you can’t control it. The question is ‘How can you position your business to benefit from the market conditions?’”
Smart Business spoke with Hite about the insurance market cycle changes, and what to expect from those changes.
How do market cycles affect pricing?
At the end of a hard market cycle when premiums are high, insurance companies are also making their highest profits. They want to increase their market share at that level, so they start slowly decreasing premiums to gain market share.
So premiums decrease over time until pricing is at a point where the insurance companies start losing money because insurance premiums don’t cover underwriting and claims expense.
Once premiums reach that level, investment returns become important. When investment return is good, pricing is aggressive, pushing past the break-even point.
Where are we in that cycle?
Right now, we are somewhere near the end of the soft market, where premiums are decreasing. Steady premium decreases have pushed many property and casualty companies past their break-even point.
Insurance companies invest conservatively, which equates to low-single-digit returns. This reduces their ability to absorb significant losses. When the markets were flying high in the 1990s with double-digit investment returns, they could withstand higher losses.
We are nearing the point where higher losses coupled with the lower investment returns may alter the softer market conditions, causing premiums to increase. It may not change today or for another year or two, but it will happen. Unfortunately, once they hit that critical level, premiums can increase much more quickly than they come down.
How will this change the way employers consider insurance?
When economic times are good, and returns in the marketplace are good, insurance companies can decrease premiums. That is great for businesses. Everyone appreciates lower premiums but they are not as critical when businesses are doing well. Conversely, rates tend to go up when the economic environment is difficult, so when businesses are struggling it is difficult to hear that premiums are increasing 20 percent for no apparent reason. Employers have to keep in mind that the insurance industry is counter-intuitive. When the business environment is going well, insurance premiums are typically low. When the business environment is struggling, premiums are typically increasing rapidly.
How can companies prepare for changes in the insurance market?
Request market information from your agent or broker during your pre-renewal meeting. Businesses need to be aware of any radical changes in the marketplace that may trigger a change in premiums or coverages. The last time premiums changed dramatically, we were deep into a soft market — then the 9/11 tragedy hit. Investment returns changed dramatically. Already soft insurance premiums increased significantly and stricter underwriting guidelines were applied. Whether premiums are low or high, it is important to make your risk look as attractive as possible to underwriters. That is your most effective strategy for keeping costs down.
What events can trigger changes?
In the last year, the tsunami in Japan and earthquakes in New Zealand and Australia have caused losses that, believe it or not, will flow back to businesses in Ohio. The entire insurance industry is connected by the underpinning of reinsurance. Every insurance company buys reinsurance on its insurance policies. That is why it’s important to keep an eye on catastrophic situations throughout the world, because those significant losses make reinsurers less profitable. As large losses mount, reinsurers must increase premiums to insurance companies to maintain their returns, which eventually trickle down to the consumer.
Even small, local insurance companies buy reinsurance from companies that were hurt by the Japanese tsunami loss. Catastrophic tornadoes in Alabama and Missouri, while not hitting Ohio, affect the entire pool. As losses increase in the pool, pressure to increase premiums is passed through to everyone.
What can companies do to improve their risk profile?
There are five key things companies can do:
Be aware of the environment around your insurance program, both in the investment community and in catastrophic losses around the world, whether it be tornadoes in Alabama and Missouri, earthquakes in Japan or hurricanes in Florida.
Know your loss experience and understand how your loss experience may affect your future premiums.
Secure a multi-year policy with rate guarantees. A few insurance companies still offer a multi-year policy that can be an attractive strategy to stabilizing premiums.
Maintain loss prevention procedures. Most insurance companies provide this service at no additional cost.
Maintain good lines of communication with your insurance professional. This will be very important in these uncertain times.
RICHARD B. HITE is the CEO of SeibertKeck Insurance Agency. Reach him at (330) 865-6573 or [email protected].
