In terms of the property and casualty insurance marketplace, California businesses have enjoyed healthy reductions in premiums over the last five years. Workers' compensation costs alone have decreased more than 50 percent since 2004. While insurance carrier profitability, increased carrier competition and capacity, investment vitality, new legislation and economic stability have resulted in an extremely "soft" insurance market since 2004, the future does not look as positive for the insurance market.
Premium increases appear to be on the horizon across all lines of property and casualty insurance. The subprime mortgage lending crisis combined with shrinking carrier underwriting profits are driving insurance toward a "hard" market, or increased costs of coverage. The question of increased premiums is not one of determining if a price increase will occur, but when the hard market will arise.
With a hard market in the very near future, what can you do to mitigate the costs of this pending cost escalation? Simply put, any business (large or small) has the ability to implement programs and protocols to minimize the impact of a hard market on the bottom line. The time is now to reinvest in an insurance procurement and risk management program that can stabilize costs long term and reduce the impact of increasing premiums in the future.
Based on the significant insurance savings over the last four years, every business should reinvest capital and manage its insurance program with the following basic principals:
Evaluate and augment risk management program: Invest resources into employees and industry experts to evaluate your existing loss control/risk management protocol program. There is no better way to reduce premium increases and insurance costs than reducing claims and exposure. No matter how strong a risk management program, there is always room for improvement and applicability.
Claims management: Require specific employees, insurance carrier representatives and insurance broker consultants to manage your past, present and future claims aggressively. Claim prevention is the best risk avoidance and cost savings tool, but when a claim does occur it is important to expedite the claim process in the most cost effective manner possible. Charge specific employees with goals relative to claims counts and reserve reductions and hold your carrier and broker accountable for these results. A proactive claims management system can result in double-digit percentage premium decreases.
Accrue cash/collateral: With premiums decreasing, now is the time to use these savings to accrue monies for future increases. This is primarily applicable to the future hard market alternative products that require higher deductible/retentions. Alternative risk products (high deductible plans, captives and self insurance) take years to evaluate and require significant cash outlays that cannot be executed under duress or critical buying scenarios. If you do not prepare for this type of product today, it will be too late to fund such programs when needed without proper planning and evaluation.
Carrier/broker consistency: It is critical to position correctly with the right insurance carrier and broker. Having an insurance procurement policy that focuses on long-term relationships and cost of risk strategies will result in greatly reduced premium increases long term. Selecting an insurance broker and carrier that is dedicated to your industry and can offer the resources and product breadth to match long- and short-terms goals is critical to minimizing market fluctuations. With longer-term relationships and consistent results, insurance carriers are less likely to increase prices at the same rate as the market.
In summary, you can greatly minimize increased costs of commercial property and casualty insurance by reinvesting premium savings today into risk management systems, forming long-term carrier relationships, selecting brokerage relationship based on risk management resources and planning for alternative risk options.
Will you be prepared for the pending hard market?
Brennan is a principal and Construction Practice Group leader with Barney & Barney.