There is good news and bad news in the insurance industry right now. The bad news is that insurance premiums are going up dramatically in 2021 for all types of insurance. The good news is that you have some control over the extent of the increase.
Fewer options, higher fees
The insurance industry is in a period of drastic change. For over two years now, more insurance claims than ever have been made and those claims are larger than they have ever been. The cost of doing business has drastically increased for insurance companies and they are responding in three ways: increasing premiums, reducing capacity (not insuring as many customers), and excluding coverage (not insuring certain situations).
The result is that businesses will find it harder and harder to get insurance. When they can find an insurance company willing to issue a policy, the premiums will be higher than in the past.
Becoming a desirable customer
Insurance providers used to undercut each other to win a customer’s business. Not anymore. All insurance providers are increasing their rates and trying to accept only the most desirable customers.
A game of musical chairs is being played and someone is going to be left standing. Who will be excluded? Customers with a history of claims will find it hard to get insurance. When insurance companies fought for new business by dropping prices, some customers would make a claim and then leave their insurance company the next year to seek out better rates. Customers with a history of switching back and forth between providers might no longer get coverage. If they do, they likely will pay a higher premium than they would if they stayed with their current provider.
Insurers now want clients that are claim-free for 5 years, and the trend is moving toward a claim-free period of 10 years. They might settle for a client that has been without a claim for 3 years, but only if they see evidence that the client has lowered their risk of a loss.
Directors and officers liability insurance (D&O) is one type of insurance for which changes are coming fast. Any organization with an external board of directors can expect to see roughly a 30% premium increase for D&O insurance, even if the organization is claim-free. There might be requirements such as a $100,000 self-insured retention clause that eliminates the possibility of your company making smaller claims. These rates will be unaffordable for many organizations and some won’t be able to secure insurance at all.
In some cases, the business will be required to submit more information than in the past. Manufacturing companies that wish to purchase property and casualty insurance should expect to submit their safety manual to the insurer. The insurance company will critique it and may require the applicant to explain certain policies. The insurer wants to know how the applicant expects these policies to prevent a safety incident.
Cybersecurity risk is top of mind for many clients because it is relatively new. If a breach occurs and information is stolen, most companies are concerned primarily with their reputation. That’s why businesses hesitate to report these incidents. As of 2018, however, all data breaches must be reported to the Privacy Commissioner of Canada, an ombudsman that reports to parliament on violations of the Privacy Act. Businesses must provide information on the breach, such as what they did to prevent the attack, what they lost, the number of files affected, the sensitivity of those files, whether they had security in place, and whether they notified other companies affected by the incident.
The Privacy Commissioner has the power to impose fines of up to $250,000. Fines are made public so we can see who has had a breach. The Privacy Commissioner dictates what else a business must do to remedy the situation, such as informing clients and suppliers. The business may also have to support those affected in ways such as paying for a year of credit monitoring or making a 24-hour help desk available to guide them as they address the consequences of the breach.
Podcast – Let’s Talk about Hard Markets
In insurance, the industry goes through hard markets. In the two parts of this podcast, Colin Rooke of Butler Byers explains what a hard market is, how it affects the capacity of the insurance industry, and what hard markets mean to businesses.
Tune in to Part 1 and Part 2 of the podcast Let’s Talk about Hard Markets by Colin Rooke.
As a precaution, companies take security measures such as backing up data regularly. This might prevent the need to pay if you have a ransomware attack, but your company’s information would still compromised, and the incident must be reported. The solution is to avoid a loss in the first place. A well-prepared company will take steps such as having adequate security software in place and training staff to avoid opening suspicious or unusual emails or clicking dubious links.
An insurance company will use a claim-free period as a starting point to decide whether it will accept you as a customer, but it needs to make sure your firm’s lack of claims is not simply luck. It needs proof. A risk management plan used to be a benefit when applying for insurance. Today, it is a necessity, and you must show you are executing the plan.
Your business needs a detailed risk management plan and evidence that you have acted on that plan to implement it. A risk management plan involves identifying and quantifying risks and then organizing and prioritizing them. The key is to show you have legitimately taken steps to reduce your company’s risk of a claim. An informed insurance broker can help you with this process.
Changes in the insurance market have significant implications for how entrepreneurs run their companies. Insurance can no longer be a crutch for mismanaged operations.
The positive side of the situation is that you have influence on the premiums you pay. The savings that materialize with a lower premium are directly related to the work you put in.
First published in the December 2020 edition of The Business Advisor.