Insurance Costs Demand Increased Vigilance

Insurance is something we pay for, yet hope we never have to use. It’s protection against an unanticipated misfortune. When you purchase insurance, you’re transferring your risk to an insurance company in exchange for a premium. The benefit is that if you incur a loss from an insured risk, the insurance company assumes all or part of that loss.

One type of insurance is property and casualty (P & C) which allows organizations to protect their assets, replace property damaged by loss or theft, provide for lost income and cover liability for negligent acts.

A deeper understanding of P & C insurance can help an organization manage premium costs to safeguard their financial well-being. An awareness of “soft” and “hard” markets, the factors that influence market fluctuations, and reviewing and implementing measures to control insurance expenses can help them prepare for the unexpected.
 
Soft vs. Hard Markets
The terms "soft market" and "hard market" are used to denote favorable or unfavorable conditions in the P & C insurance markets. When insurance pricing is stable or falling, it is referred to as a soft market. In a soft market, premiums are low and relatively affordable. Insurance companies actively compete for new business. This is a classic buyer's market — insurance providers are competing with each other to offer insurance to as many organizations as possible at the most favorable rates. In recent years, soft markets have generally predominated.

On the other hand, hard markets are distinguished by quickly rising insurance premium rates. This is a seller’s market. During hard periods, organizations may go without adequate excess coverage, sacrifice investments or revise budgets to accommodate escalating costs. Insurance premiums may increase even for organizations that have not experienced losses related to property damage, for instance. Carriers are charging a company more in premium rates as a way of improving their profitability.
 
Market Fluctuations
The insurance market is always in a state of flux, making pricing uncertain.  A number of factors can cause changes in the market cycle leading to increased P & C insurance rates. These factors include:

  • A fear of litigation cases that the insurance company may lose.
  • Natural disasters including hurricanes ("Superstorm Sandy" was the deadliest and most destructive hurricane of the 2012 Atlantic hurricane season and the second-costliest hurricane in United States history), earthquakes, tornadoes and floods.
  • Man-made disasters including terrorist attacks.
  • Changing interest rates.
  • Underperforming investment income.

In 2013, average P & C rate increases were three percent, suggesting that even a company that had minimal losses will experience an increase in rates and premiums this year. For businesses with moderate to large losses, premiums could dramatically surge as carriers look to recover money paid out in claims. 
 
Controlling P & C Costs
Although insurance buyers may not have any influence over Mother Nature or widespread economic downturns, there are ways to handle P & C costs. Here’s how a company can minimize the impact of a hard market and rate increases:

  1. Analyze claims history and implement a strong risk management plan to help steer pricing in a more favorable direction.
  2. Establish a solid business contingency plan to account for disasters and other unpredictable risks.
  3. Build a company culture focused on safety.
  4. Manage claims efficiently to keep costs down.
  5. Discuss all the alternatives to lower premiums with your insurance agent and select those that make the most sense.

History has shown us that the insurance industry will continue to vacillate between hard and soft market cycles. The solution to coping with these uncertainties is to proactively manage business operations to lower the frequency and severity of claims that drive insurance and risk management costs. 

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