Best's Review

AM BEST'S MONTHLY INSURANCE MAGAZINE



Risk Adviser
Hard Times

With tighter underwriting and reduced limits in play, the industry must work together to maintain profitability.
  • Lance Ewing
  • April 2020
  • print this page

 

Two customers were complaining about higher insurance premiums. One of them said, “There is a sign at my insurance agent's office, 'We take Visa, Mastercard, Discover Card, and American Express.' After I paid my premium they took my Visa, my Mastercard, my Discover Card, and my American Express.” Or so the story goes. There is no longer a rumor of the hardening commercial insurance market. The property/casualty market has turned hard with several lines stiffer and some more expensive than others. A hard insurance market is defined as when clients seeking coverage from carriers in most cases will find: tighter underwriting criteria, limited markets for the client's industry or activity, reduced limits, increased declinations to quote, and little or no room for negotiating terms or policy language. The insurance carriers are calling the tune.

The reasons for hard insurance market and premium price increases are numerous. These include but are not limited to, higher costs for claims (adverse loss trending), the dismal return on investments carriers had faced, mergers and consolidation of carriers, increased regulations, the reinsurance market and the lack of a true cyclical hard-soft market (aka a much longer and softer market). Many carriers had warned beforehand of the looming hard market being on the horizon, even as far back as two years ago. Many clients and risk management professionals, along with several professionals in the agent/brokerage community, did not heed the warning signs and have now been faced with the challenge of delivering uncomfortable news to the C-suite and their boards. When telling a client what may be bad news remind them that the decreased pricing and flat renewals of the last several years has led to consolidation in the carrier market and the necessity to leave and tighten certain market segments. The last seven plus prior years the client was able to see increased capacity, better coverage terms and exceptionally competitive pricing leading to compounded year-over-year savings. Insurance was cheap. Clients and brokers have to calculate those prior savings into the cost of today's increased premiums and not focus solely on the rate increases. Seeing the market through a 10-year lens will help shape the conversation related to the hard market.

On the other hand, as has happened in the past, carriers cannot get too aggressive, premium gouge or get too greedy too fast. Clawing it all back at once would not be the best approach for the insurance companies. When faced with a hard market, P/C clients will become more creative and resourceful. The previous hard market saw the development and increased use of captives, larger retentions, self-funding, layered and shared programs, the growth of risk pooling entities, and in some cases “going naked,” the term for not purchasing coverage and self-insuring. Increased internal loss control and risk appetite assessments are more likely to be in the client toolbox in a continued hard market. Just as carriers have inordinate amount of analytics and data to validate their position, so now do clients and their brokers.

Loss data, accidents per-miles-driven, decreased payroll, quarterly revenue, shareholder litigation costs, and other data mining all are available to the client in real time. The client can now see via their own data and predictive analytics where it may make sense to increase a self-insured retention, drop limits or financially form a captive.

Insurance is a symbiotic dance between the client, the broker, the insurance carrier and the reinsurer. Each has to remain profitable for the interdependency to exist.


 

Best’s Review columnist Lance Ewing is executive vice president of Global Risk Management for Cotton Holdings Inc. He also is the former president of the Risk and Insurance Management Society. He can be reached at bestreviewcomment@ambest.com.



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