The insurance marketplace is a funny place; pricing and availability can appear and disappear seemingly at random, and predicting changes is more an art form than a science. Some years, insurance buyers benefit from falling costs and expanded cover. Other times, when markets harden, business owners must make tough choices regarding their insurance and loss control programmes. Understanding how business owners and risk managers can prepare for an insurance “hard market” and putting those preparations into practice, can help your firm maintain a strong financial position complete with adequate protection for your organisation.
What is a hardening market?
Hard markets are characterised by quickly rising insurance premium costs and shrinking capacity by insurers. During hard markets, insurance buyers are often forced to forego excess cover, sacrifice investments or revise budgets to accommodate skyrocketing insurance costs. In order for a market to be considered hard, prices must generally increase an average of 15 per cent across the board; as you can see below, rising prices can average as high as 25 per cent for three consecutive years. These sudden swings are unpredictable, and can greatly affect your ability to protect your business.
Percentage Change from Prior Year in Net Premiums Written
Source: Insurance Information Institute
Why do hard markets occur?
Hard markets have been surprisingly rare, occurring only three times during the last half century, but they often occur quite suddenly and without much warning. Often, a large catastrophe, either natural or economic in nature is the trigger for a hardening market. In this case, Covid-19 has had a massive impact on the economy worldwide.
What businesses need to do:
Selling your Story to an Underwriter: Your relationship with an underwriter can make a world of difference during times of market upheaval. Hard markets make underwriters more critical, and it’s prudent to come prepared for any concerns the underwriter may address. This is where insurance brokers are worth their salt, they are experienced insurance professionals who deal with insurance placements daily. They know how to present your business to underwriters to negotiate the best deals on your insurance premiums.
Audit your information for accuracy: Accurate information is vital to the bid process; in many cases, potential insureds provide underwriters an inaccurate list of assets or employees. This swells their numbers, and their costs. Conversely, underreporting your payroll or overstating your assets can be characterised as fraud.
Know your loss history: In a hard market, underwriters will be especially critical in discerning loss trends. You have to be prepared to explain the factors contributing to a specific loss and the steps you’ve taken to mitigate the risk of a future loss.
Be Prepared for Changes
Even the most prepared organisations will have to accommodate the changes that come with a hard market. Preparing for possible market changes takes an integrated insurance purchasing and risk management approach, where buyers are prepared for possible coming changes.
Structuring Insurance Programmes for Maximum Benefit: In a hardening market, some lines of cover may simply no longer be cost-effective for your firm. Consider a situation in which supply chain insurance moves well outside the realm of affordability. The risk of a supply chain interruption remains, so to compensate it might be prudent to increase an alternative line to continue accommodating your firm’s overall risk appetite.
Remember What’s Important: If your broker deems it necessary, it may be time to shop your insurer to look for the most competitive deal. However, it’s important to evaluate your entire insurance experience. Certain insurers may be more competitive on price, yet not offer the same level of service or support. In addressing your total cost of risk, make sure you’re seeing the whole picture.
Business owners who proactively address risk, control losses and manage exposures will be adequately prepared for a hardening market. Work with your broker now to prepare your business for changes down the road.
Take Charge of Loss Control
The best approach to control losses is to prevent injury and illness, manage claims effectively and implement cost containment strategies. If you work to reduce risk and prevent loss now, the increase in your premiums will be minimised later. The Risk Hub Ltd can help you control costs and protect your business. Our consultative approach can accomplish the following:
Pinpoint your exposures and cost drivers.
Identify the best loss control solutions to address your unique risks.
Create a solid business continuity plan to account for disasters and other unpredictable risks.
Build a company culture focused on safety.
Manage claims efficiently to keep costs down.