BY: George F. James, CIC
gjames@bankersinsurance.net | (276) 223-4318
Most industries experience cycles of expansion and contraction, seasons of growth and loss. The insurance industry is no different, and these cycles affect insurance costs and the coverages offered. Although it would seem that the insurance market should grow when the overall economy is expanding and shrink when contracting, that is not always the case. Economic factors, from gas prices to inflation rates, influence the insurance market. But just because the economy may be booming doesn’t mean insurance is in a growth phase and prices are dropping. In fact, at times they are 180 degrees out of sync.
We term these industry cycles “soft” and “hard” insurance markets. A soft market is where insurance is easy to purchase, less expensive, and coverages are broad as insurance companies try to attract new buyers. Hence the term “soft market”. Think about it like a buyer’s market, where insurance companies compete against each other to win your business. A soft market means insurance companies feel stable, lower their guard, and insure more businesses. This leads to an increase in the capacity of the insurance market.
Here we are reminded of a fundamental marketplace principle, the law of supply and demand. A soft market means an increase in insurance supply and an increase in competition between insurance companies, both of which drive insurance costs down. But price is not the only variable, so in a soft market insurance companies also broaden coverages to protect more kinds of risks, also to attract more insurance sales. They may even reduce or eliminate deductibles and retentions. For businesses purchasing insurance, these are good times.
A hard insurance market is the opposite. It is when insurance companies find themselves needing to increase prices and reduce coverages, even if it means losing sales. During such markets, insurance companies are more focused internally, protecting their financial position from the risk of having to pay out too much in claims or to make up for losses if investments are down.
Today’s Business Insurance Market
Today, the business insurance market is hardening. Across U.S. property, recent catastrophic wildfires, hurricanes, windstorms, hail, and floods meant $112 billion in claim payouts in 2021 alone 1, prompting conditions to harden with sustained escalation in insurance pricing. Large payouts such as these reduce an insurance company’s financial reserves and prompt their need to replenish them. These factors are compounded by current labor shortages, supply chain issues, and high inflation which increase the need for larger property coverage levels, further increasing insurance costs.
From a liability standpoint, today’s social inflation increases the financial burden on the insurance industry. Social inflation refers to rising court costs, claim payouts, and ultimately how much businesses pay for coverage. The tendency to sue is increasing and juries are handing out higher awards. From 2014 to 2018, U.S. plaintiff awards almost doubled, with a few exceeding $1 billion 2. A general anti-corporate sentiment exists along with the expectation that someone needs to pay for damages or injuries, regardless of negligence. Nuclear verdicts are at the root of social inflation, which are where a jury awards a settlement substantially higher than expected. Within directors and officers liability alone, shareholder class action suits doubled in the last three years.
Even COVID-19 impacted today’s insurance prices. Insurance is a global market, so issues that impact other countries can affect what we pay domestically. COVID caused an extreme disruption to everyone’s daily lives, families, communities, and businesses, increasing economic and political uncertainty, causing insurance companies to be more restrictive in what they will insure, thereby further hardening the market.
Cyber Liability
Recently, the cyber liability insurance market has been particularly impacted. The cybersecurity landscape evolves rapidly, and ransomware is at an epidemic status. Ransomware is software that encrypts a victim’s computers or data, rendering it useless, until a ransom is paid. This accounts for the majority of cyber insurance claims, and cases continue to increase in number and severity. Instead of four or five figure sums, multimillion dollar demands are more common. The effect of these fast-evolving cyber threats is compounded by the overall insurance market’s shrinking capacity. Reinsurance is increasingly expensive, leading to restrictive cyber insurance policies and reduced availability. In fact, certain cyber insurance companies pulled out of the market altogether, no longer offering this coverage. Those insurance companies that remain closely monitor their client’s internal controls and procedures to reduce the possibility of claims. Adoption of multi-factor authentication is key, without which many insurance companies will not offer quotes. And if they do, coverage is more restrictive and retentions are increased. Businesses should request renewal terms from their insurance company early to reserve time should they need to search out other options.
Now is the time to double down on business risks and determine how to mitigate them. During a hard market, businesses should pay extra attention to their business insurance program. Deepen your relationship with your insurance company and agent, because hard markets are when clients that proactively manage business risk receive the most benefit. Be willing to adjust operations to reduce risk or shift it to other parties. Below are our recommendations to positively position your business during this hard market.
Reduce Risk
Are there areas the business could reduce risk and save on insurance cost? Ask your insurance agent for a risk review. Often, mitigating risk doesn’t mean purchasing more insurance. Many non-insurance mitigation strategies cost nothing. Are you a general contractor? Maybe it’s time to implement a return-to-work program. A restaurant? An upgrade to that ANSUL® system may be due. Communicating what you are doing to reduce risk with your insurance company strengthens the relationship and demonstrates commitment.
Review Insurance Limits
Insurance limits that are too low will prove costly when a claim arises, but conversely there is no need to pay for limits that are too high. Check policy details like ensuring business auto lists are up to date, payroll estimates are current, and sales projections are accurate. Review building replacement costs.
Start Early
Engage your insurance agent ahead of your insurance renewal. At Bankers Insurance, we are your advocate with the insurance company and can bring the strength of this large agency to negotiate on your behalf. Engaging early demonstrates a willingness to manage risk, strengthens the relationship with your insurance company, and provides time to ensure renewal policy terms are offered to your benefit. For risk mitigation efforts, don’t wait. Start now to receive maximum benefit.
Though we are in a hardening market, historically these cycles last only a few years. In our free market, competition is a powerful force and will again curb pricing. Questions on business insurance? Contact your Bankers Insurance agent. Not a client of ours? Let us compete for your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.
Was this post helpful?
- Share it using the links below
- Review all our business insurance posts
- Review all our business insurance products
- Subscribe
Comments are closed.