If you are a business owner or homeowner, you have seen your property and casualty insurance costs rise. Property, liability, home, auto, excess, employment practices liability, cyber insurance, directors and officers, professional liability are all on the rise, with the possible exception being workers compensation.
You likely also heard it is a result of a hard market, but do you really know what that is and is there any strategy to navigating it?
A hard insurance market is when the money available to underwrite risks shrinks, companies and underwriters then become much more discriminating about who they will offer insurance to, and the cost of that insurance increases as a result.
There are many factors that can cause a hard market. Catastrophes like the fires in California, are one. Increased frequency and severity of claims is another. Think about the rising costs to fix or replace newer, more technologically equipped vehicles or what it takes to rebuild a home with today’s prices.
One less obvious factor is “social inflation.” Originally coined by Warren Buffett in his 1977 chairman’s letter to stockholders, he described it as a broadening definition by society and juries of what is covered by insurance policies. In recent years, it is being used to describe changes in societal attitudes and beliefs that lead to much larger jury awards. According to a report by Cornerstone Research, in 2020 $4.1 billion was paid out in 77 class action securities judgements compared to 2019 when $2.2 billion was paid out in 74 judgements.
One of the most frustrating aspects of a hard market is how some are more adversely affected than others. Most homeowners and business owners have seen modest to moderate increases in their property and casualty lines of insurance. However, others who may have poor loss history, property in a rural “brush area,” or who are in a high-risk industry have seen exponential increases.
Locally, rural properties are being non-renewed at a high rate and owners are forced to go with options that cost double, triple or even more with less coverage.
Agri-business risks in general are being hit with increases across the board but especially their excess liability costs. Truckers have been suffering massive increases for several years and wineries in very rural areas are struggling to find property insurance for some of their structures and stock based on where they are located.
If there is any good news in the insurance market, it is that we are seeing signs the hard market may be leveling off. Many insurers had a better-than-expected year in 2020 and the uncertainty around COVID-19 is settling. We are not at the point where prices are beginning to decrease, or companies are suddenly going to jump at the chance to write a rural property, but a slowing of the rate of increase is a welcome start.
While we are at the mercy of the marketplace to a certain extent, there are things you can do to help navigate your business through a hard market:
- Be Prepared. Talk to your agent early and make sure you are aware of the issues you and your business face. Get a plan together on how to address potential roadblocks. If you are facing large increases that will greatly impact your business, it is best to know that as soon as possible to help manage the impact.
- Review Your Insurance Program Often and Analyze Your Coverages. Making sure your insurance program fits your needs is of the utmost importance. Make sure your agent is a seasoned professional who can guide you through the process.
- Prioritize Your Needs and Discuss Your Adversity to Risk. If your insurance costs are cramping your budget, consider prioritizing your needs. Cost-benefit analysis changes from a soft to hard market. A once broad and affordable policy may have changed to a stripped-down expensive policy. Determine your risk adversity. Can you take on more risk and self-insure certain exposures? All this needs to be done with careful thought, caution and a full understanding of what you are doing.
- Know and Understand Your Loss History and Trends. It is important to understand your losses, how they occurred, why they occurred and how you have addressed the situation to keep similar losses from occurring in the future. Being able to express this and demonstrate it to an insurance company can help your attractiveness.
- Focus on Risk Management. Investment of time to identify and analyze risks in order to mitigate or even eliminate them in your business is well worth the effort. Reducing claims in both frequency and severity makes you more attractive to the market. Furthermore, businesses that have put time and effort into risk management can usually tell a very positive story about what they have accomplished and how they accomplished it. These stories are wonderful to share with insurance carriers.
The Santa Maria Times has partnered with the Santa Maria Valley Chamber of Commerce to highlight local businesses in Santa Maria and in Orcutt that have built their business futures right here.
We will publish two Chamber Spotlight articles from businesses in the Santa Maria Valley highlighting their path to opening, growing and maintaining their businesses and we will also publish one video a month featuring an interview between a featured business in the area and a Digital Ambassador from the Chamber.
Learn more about the work and the impact of the Santa Maria Valley Chamber of Commerce on their website, www.SantaMaria.com