“Is my insurer gouging me just because they can?” A lot of people have been asking this through 2019 as the effects of the insurance industry’s flip from a buyer’s market to a seller’s market has hit home.
The usual follow-up questions are something like: “What reason could my insurer have for increasing my premiums? My business hasn’t become any riskier!”
To give you an answer, there’s a few things to know about the current state of insurance:
- The insurance industry runs on multi-year price cycles: right now premiums are trending upwards.
- Natural disasters are increasingly less predictable both in occurrence and severity. This randomness combined with rising rebuilding costs, means insurers are paying larger claims more often.
For example, since August, roughly 700 buildings and 2 million hectares of countryside have been destroyed in bushfires nationwide. At the time of writing, there are still hundreds of bushfires ablaze across Australia. Further, if you cast your mind back, 2019 began with cyclones, hailstorms and widespread flooding.
The overall result for insurers? Difficult market conditions.
Insurers are like you and your business in that they transfer their risk by “buying insurance” for catastrophic events, like bushfires, where they’d have to pay out a lot of claims. This is called reinsurance. And reinsurance premiums are on the rise. This raises the operating costs for insurers, so insurers are passing on the price rises in response.
This article will look at how these factors are affecting your premiums and what you can do about it.
Insurers are feeling the squeeze too
A decade ago, the insurance market was hot: lots of providers and lots of capacity to take on risk – a buyer’s market. From the perspective of a business needing insurance, it was cheap and easy to transfer risk to a contract of insurance.
And so insurers were selling a lot of policies. As a result of the sheer number sold, the gross volume of claims also rose. I’m in no way implying that insurers are incompetent at estimating risk, just that a percentage of policies will always yield claims somewhere down the line. More policies, more claims.
This trend caused the market to slow and then gradually reverse. The wheel has now turned to the current situation where the reinsurers (the ones backing insurers) have tightened their criteria.
These industry heavyweights are getting pickier when it comes to who and what they insure. Some are leaving certain business sectors entirely.
As a result, insurers are facing higher operating costs and have fewer and pickier reinsurers to turn to. All of this is now combined with a generally lower risk appetite across the economy. Therefore, the insurance industry is now a seller’s market.
It means insurers are heavily scrutinising risks for exposure and pricing their premium models accordingly. In other words, if you have a high likelihood of making a claim, you’re going to be paying substantial premiums. Some are arguing this approach is, by far, a fairer way of pricing risks.
This is nonetheless bad news for anyone who is:
- Located in a high-risk area: For example, if you’re insuring a combustible structure in a bushfire-prone area, your premiums are going to be astronomical.
- In a high-risk business: Getting insurance for, say, a jumping castle business has always been difficult. These days, it’s almost impossible unless you have a broker who knows their stuff.
- Offering insurance services and advice: Brokers (such as myself) have a smaller pool of insurers to utilise. The competition is just not there anymore.
The good news in all this? The insurance industry is cyclical. While premium increases might be stinging you now, they won’t keep rising forever. Eventually, the buyer’s market of 10 years ago will return.
Caught short by natural disasters
I’m not getting into the climate change debate, but the fact is that insurers are paying out more on natural disaster claims these days. The 2019 bushfire season is now in its fifth straight month of devastation. And it’s fairly likely that 2020 will open with a cyclone or two.
While the overall number of natural disasters does not seem to be rising, their intensity has. And we certainly hear more about it all on the news and social media than ever before. Worse disasters and more coverage seems to be a global trend. What it means is instead of, say, three small fires generating 100 claims each, we get one big fire that generates 1000 claims.
It’s no surprise that insurers are analysing their risks carefully. To protect themselves while they do so, everyone in certain industries or who faces a certain type of risk has been painted with the same brush. I am already seeing people having problems insuring any properties above the 24th parallel – roughly Seventeen Seventy and north.
Of course, insurers have funds to cover natural disaster payouts. The problem is that they’ve been unprepared for the higher rate of claims per disaster. In turn, the reinsurers are pressuring insurers to increase premiums for customers.
To illustrate the pressure insurers are under to increase rates, a commercial insurer recently told me that their actuaries now say that if an insurer is winning more than 80 percent of the quotes they make to brokers, then their premium rates are too low.
Caught in the middle of all this, what’s an insurer to do? Do they:
- Raise premiums?
- Scrutinise exposures?
- Limit coverate?
Well, they’re doing all three at once.
What you can do about rising premiums
Being an insurance customer in a market dominated by these patterns can make you feel powerless, but there are things you can do if you change the way you approach risk.
Remember when I said that it used to be easy and cheap to transfer risk to insurers and that now you can’t do that? What you should now do instead is engage with your risks. Control them, monitor them, track them and then use your risk-mitigation regime as leverage to get a better result when insuring the risks you can’t handle.
If you don’t know how to do all this, then get help from someone who has specific risk-management qualifications. With hundreds of billions of dollars wrapped up in the insurance industry worldwide, you shouldn’t be surprised to find that risk management is a field of intense academic, scientific and economic research.
So look for people with bona fide qualifications.
Do it right and you won’t be paying to just insure your risks, you’ll be acting to alleviate your risks in the first place.
Here’s how I look at a business with my risk-mitigation hat on:
- Risk: Take a stock of every risk the business faces: operational, financial, economic, etc. Identify which risks can be mitigated.
- Reward: Once the areas of unnecessary risk exposure are found, begin mitigating them internally. This might mean you have to rejig your business model. This is actually a good thing, because it will make your business more robust.
- Repeat: The insurance industry’s conditions will change, so revisit your insurance strategy regularly. When you’re in a hardening market (like now) your job is to make your business more robust and appealing to a potential insurer. That is, to mitigate your risks and be able to prove it.
A risk professional can help you at each stage. Look to work with those who have real academic training and business experience.
There is also the option of doing nothing. However, we’ve seen premiums rise up to 400% in certain cases, so it’s virtually guaranteed you’ll be better off if you look at your options before your next bill … or worse, your next claim.
With your unmatched knowledge of your business and your risk-mitigation expert’s understanding of the wonderful world of insurance, together you’ll ensure you keep paying a fair price for the risks your business faces – no matter what the market does.