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How to Survive a Hard Market
In the insurance industry, as in most long-term endeavors, there are periods of growth and prosperity, and there are periods of struggle, loss and down-sizing. In insurance, the two phases are called soft-markets and hard-markets. Since virtually everybody needs some form of insurance in their life, these phases can affect your wallet and your life deeply. They can determine how much you spend for insurance, how much coverage you get for your money, and how protected you are on your policies. A smart shopper should know the differences in the markets and how to protect himself.
In the United States, we experienced a soft market for the first decade of the 21st century. A soft-market is a period of time when the insurance companies are making money fairly consistently. Since it’s easy to show a profit, they can relax their guidelines when offering policies to customers. Premiums decrease during this period and the carriers offer broader coverage. There are less underwriting restrictions and much more competition. This is evident by the number of advertisements witnessed over the last ten years.
Although the change has been coming for a few years, in 2011 the market began to firm up rapidly and by the end of 2012, we were definitely in a hard market which continues to become more restrictive daily. During a hard market, premiums increase, underwriting becomes more stringent and coverage narrows. You may already be witnessing this if you’ve received renewals on your policies or had to shop for new ones.
Why have we entered a hard market? The first reason is the economic crunch of the last few years. Insurance companies can no longer get a good return on investment. If you can get a double digit return on your money, it’s a lot easier to succeed. That’s no longer possible and so the carriers have to rely on solid underwriting to reduce the claims they pay. This means they have to collect more money from customers than they pay out in claims and other costs. To make this work, they either have to increase premiums to collect more money, or find ways to pay less such as eliminating certain risks.
Business and commercial insurance is also getting hit hard. When the insurance company evaluates a commercial policy, two things that determine premium are payroll and profit or revenue. As businesses struggled to survive, many were forced to cut employees. Since payroll and profits declined, that means the premium they paid decreased which means less money for the insurance company. Once again, carriers had to find ways to boost their income. One way is to increase premiums, which means the businesses struggle even more and a vicious cycle begins.
The second reason we’ve entered a hard-market is because of Mother Nature. The last few years have seen a surge of natural disasters never witnessed before in history. Hurricanes, tornadoes, tsunamis, earthquakes and floods have devastated major cities. Not only does this affect the losses of domestic companies, but many of them are tied to international companies for reinsurance. Some of the major companies in the country paid out millions and billions of dollars in claims recently.
What can you do as a consumer to combat the hard market? Unfortunately, you can’t reverse it anymore than you can reverse the ocean tides. One thing that we suggest is to shop around. Every company varies in terms of their underwriting guidelines and therefore the risks they incur are different. Many will increase their overall premium, but offer discounts to certain qualifying customers. In recent years, companies are offering discounts for education level, marital status and type of residence you live in. Some companies are now using your driving habits as a means to evaluate risks. We even have some companies who will discount the rate if you bind the policy before the date it takes effect.
One trap to be wary of is differences in coverage offered. One example we’re seeing more often is the deductible, particularly for homeowner’s policies. A $500 deductible used to be fairly common, but now some companies won’t even offer it. Be cautious of percentage deductibles. If yours is 1% and your home is worth $300,000, you’ll have to pay $3000 before your insurance will kick-in. You also need to read the Exclusions portion of your policies, since this will define what is not covered. In many cases, you can purchase coverage for exclusions if you feel you need protection from it.
The most important thing you need to know is that all insurance companies are different. A company that was cheapest for you in 2012 may not be the cheapest in 2013. Carriers are submitting updates to the Department of Insurance several times each year, attempting to stay competitive yet also make a profit. The only cost involved in shopping around is your time. As we get deeper into the hard market, those people who evaluate their choices will wind up saving the most money.