Insurance Costs Are UP in a Brutal Hard Market

How to drive costs down

Two markets are inherently forever cyclical: the stock market and the commercial insurance market. Their behaviors are similar.

The insurance market goes from soft patches where coverage is affordable and plentiful, to hard markets where availability restricts and prices rise, sometimes brutally.

The Hard Insurance Market

We are in one of those dramatic hard markets now. This hard market will end – it has to because of pure economics, and we need to be ready to manage the movement when it does.

The stock market sees roaring bull markets where stock prices go up relentlessly. Given the upward momentum, it is a hard decision to sell shares, with the worry being stocks will continue to go up afterwards.

At a point, though, a correction is inevitable. When investors see so much paper profit which could evaporate overnight, the risk then becomes too great not to sell and realize the profits.

Windfall Profits Cause the Turn

Similarly, the insurance market cycle has to turn eventually. Premiums will have risen over time so much that insurers are making windfall profits. They can just continue to enjoy the high profit margins, or …. make even more profit in total by increasing market share. They can write more business at the existing high levels, though at a slightly lower margin, by competing for business on price. They will rebel from the cartel in order to profit individually via higher volume. When that happens, some other insurers will lose business to the renegade, and they will also have to reduce price to maintain their book of business. It becomes contagious and the core of the hard market starts to break down.

The Need to Take Action

It is at this point that the buyer of business insurance has to react.

The insured needs market intelligence and the knowledge and ability to break through the resistance put up by brokers.

Because commercial insurance is sold through independent brokers, you will not know immediately that the market dynamic described above is happening. Brokers neutralize the downward price move for their own business reasons. We need to break through the broker block and accelerate the price movement downward for the insured.

The Broker Blocking Action

What creates the block is this:

Brokers, like the insurers, are enjoying the too-high insurance premiums. Their compensation is a flat % of the premium and that % does not reduce in times of premium inflation. The higher the premium, the higher the broker compensation. In addition to the up-front percent commission there is also the contingent commission arrangement that brokers have, which resembles profit sharing. The last thing the brokers are hoping for is an end to the hard market.

There is another phenomenon at play as well – the symbiotic broker/insurer relationship. Brokers and insurers are bound together financially. They take care of each other. In a changing market, what underwriters want most from brokers is an ear to the ground on pricing, and an agreement to work together. The underwriter hates to leave money “on the table.” A common underwriter-to- broker question would be: “Can we keep our price level?” In other words “I’m counting on you to help me keep the business while at the same time maintaining price.”

Think back to the stock market again. Why do we need to consider taking profits? Because the market when way up can come down fast, too fast for us to react before prices have crashed. Why not this same speed coming down for commercial insurance premiums? The broker shock absorber action. For example, in a world where the insured’s information is limited, the insured may be happy with a 5% reduction presented with much fanfare by the insured’s broker. The low bar is set and then exceeded. That’s not good enough. Without broker involvement, the move in prices downward would be as swift as the move upward.

Accelerate the Downward Price Movement

Considering all this, what do we need to do? :

Break through the broker blocking move and put steps in play to accelerate the downward price action for the insured. This involves, first, market intelligence – having the knowledge that the market is at this stage, and second, the knowledge, ability and willingness to take control of the marketing effort. We must know which insurers are competing (and there always are some who are smart enough to be the leaders) and access those markets through other channels, while simultaneously stopping the incumbent broker from blocking access.

Be among the first to know the market has turned, and aggressively manage the process to push through the downward stickiness to achieve fast, significant premium reductions.

Have a risk manager on your side

The largest companies have entire risk management departments reporting to the CFO. You need risk management too.