As a property & casualty insurance buyer for your organization I am sure you are aware of the rate increases that are slowly driving up the costs of insurance. The end of the fourth quarter in 2012 marked the seventh straight quarter of property & asualty rate increases. According to Towers Watson's most recent Commercial Lines Insurance Pricing Survey, commercial insurance prices in aggregate increased by almost 7% during the fourth quarter of 2012. The largest increases are being seen in the following lines of coverages: Worker's Compensation, Employment Practices, Director's & Officer's, and Property (especially coastal properties).
What are the five industry factors that drive rates up?
1. Noncastastrophic Losses - Individual and industry peer losses (from a trend and frequency standpoint)
2. Interest Rate Changes - When investment returns fall, pressure on underwriting results to produce the required returns increases.
3. Industry Capacity Levels - How much capacity does an insurance carrier have for new and existing business?
4. Catastrophic Losses - This becomes a powerful factor in the affected region, but has a small impact on the industry as a whole unless multiple catastrophic events happen in the same calendar year.
5. Momentum - Pricing based on rate trends of recent quarters. If rates are up 5% last quarter, the market will be biased toward increasing rates again this quarter and next, until some other factor changes or until calendar-year profitability increase so far as to make the rates flatten.
What are Underwriters doing to drive rate increases?
- Predictive Modeling: Rates are being based upon "date mining" / actuarial studies.
- "Re-Underwriting": During the renewal process underwriters are "taking a harder" look at each client. In return, more questions are being asked even on existing clients.
- Less Underwriter Appetite: Carriers are redefining the industries that they are looking to write new business in. Therefore, you may encounter less carriers vying for your business.
- Raising Property Values: The practice of ensuring that adequate limits are being used.
- Worker's Compensation: The raise in health care costs and the volatility in this line of coverage has made worker's compensation an oftentimes unprofitable line of coverage for many insurance carriers. Therefore, rate increases are being used to offset costs/unprofitability.
- Endorsements and Policy Language: Be sure you and your broker read through endorsements to ensure new policy wording has not restricted coverage.
What can I do to offset rate increases?
The Best "Offense" is an Active Good "Defense"
- Early Renewal Strategy with your Broker: Set expectations and have a plan. Your broker must be willing to "fight" on your behalf.
- Have a Story to Tell: What are "you" doing to take ownership of your risk management program? Safety programs? Why are you a good risk?
- Face-to-Face Meetings: Be willing to meet with not only your broker but your underwriter that is representing your insurance carrier. Hearing a CFO tell the company’s story about its risks and what’s being done to mitigate them is music to an insurer’s ears.
- Be Prepared for Underwriter Push Back: What if the insurance carrier is asking to raise property values? Have a strategy in place!
- Be Open to Change: Changing insurance carriers and brokers is not a bad thing.
- Alternative Risk Transfer Mechanisms: High Deductibles, Captives, and Self-Inusring.
Enjoy the NCAA tournament! Have a plan and be willing to change the plan during the renewal process!
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