in a hard market for insurance
After almost 11 years of sliding insurance prices, a market correction that began in late 1999 has continued and accelerated throughout the past year. It has resulted in a hard market for insurance.
In the insurance industry, we describe the market as hard when prices are rising, coverage availability shrinks and renewal conditions become more restrictive. High-risk industries are the first to feel the pressure.
Today, only a handful of companies are willing to write insurance to high-risk industries. A more alarming situation is the excess layers of insurance. At the time of this writing, there are a limited number of insurance carriers willing to write excess liability or umbrella-type policies. That creates a rather concerning level of competition to keep premiums in check.
Recognizing the changes taking place, following are seven steps your company can implement to survive in the hard market.
Step 1: Take action, now – Look for ways to implement cost saving strategies now rather than waiting for your insurance renewal. The best way to ensure you’re not blindsided and left with unattractive options is to be prepared. Educate yourself about the hard market and identify who the players are in your industry. Learn which brokers specialize in your industry.
Step 2: Strengthen safety programs – Safety is always important. In a hard market, it is critical. Even if you feel you have a solid program, strengthen it. If you don’t have one, start one. Ask yourself, "Are we going through the motions, or are we really doing it?"
A strong safety culture starts at the top and constant communication will help build the long-term culture you need to survive. Identify your Top 10 Safety Critical Success Factors. Measure your results and share them throughout the organization from management to all your employees.
Step 3: Consider taking more risk – Consider options such as increasing your deductibles or self-insuring parts of your business. By retaining more risk, you can keep costs in check. Since your premium will go down, a larger part of your "total cost of risk" will be your claims. By reducing your claims, you will in effect reduce your total cost of risk and improve your cash flow.
As insurance underwriters review and price your account, they are more confident writing a company that has "skin in the game." If you are unwilling to underwrite yourself, they will most likely not be as aggressive when pricing your account.
Regardless of what you decide, give yourself enough time to analyze the data and make the necessary evaluations.
Step 4: Analyze your critical risk factors – In a hard market, underwriting standards are scrutinized more carefully. Determine first which critical factors most directly influence your insurance costs. Be aware and measure your critical risk factors so you can improve areas that are deficient.
Step 5: Consider insurance program adjustments – Review all components of your insurance program. Make sure coverages and limits are appropriate. In a softer market, coverages and limits are "thrown in" at little or no charge. Today, you’ll most likely be charged for all coverages and limits.
With fewer insurance carriers participating in the higher layers (umbrellas), premiums are increasing dramatically. Many companies have been forced to reduce, and in some cases eliminate, these coverages. Obviously, that is a risky proposition for companies that have assets to protect. Making changes to liability limits must be done only after careful review with your trusted advisors.
Step 6: Strengthen relationships – The best way to successfully weather a hard insurance market, or any market for that matter, is to have a committed relationship with your insurance partners. Make sure you are aware of the resources available from your insurance partners. Contact your safety representative and inform him or her of what you’re doing. Focus on building a personal relationship with the representatives that touch your account (underwriting, safety, claims). Switching insurance companies every other year will reduce the likelihood of a favorable quote and make it more difficult to find a "partner."
Step 7: View risk as an opportunity – Fear of taking risks can paralyze a company. Create a process to identify risks facing your company and deal with those risks on a strategic level. You can no longer expose your company to areas of unidentified and unforeseen risk. We call this situation The Risk Uncertainty Trap.
By dealing with those risks proactively, you will find hidden opportunities that will allow you to become more profitable, reach your goals, and grow your business. Create a strategic plan that integrates risk management and business planning.
Mike Natalizio is president of HNI Company, Inc., an insurance broker located in New Berlin, providing insurance, risk management, and loss-control services to businesses; www.hni.com
March 15, 2002 Small Business Times, Milwaukee
