Agent: Hi Mr. Fantastic Client, I’ve got your insurance renewal prepared for you.
You: Great! <with sarcasm> I assume that since my sales are about the same as last year, payrolls too, and I don’t have any new toys to insure that I can expect to pay the same as I did last year?
Agent: Well, actually, we’re coming into a “hard market” and your premiums are up about 12%. You see, insurance companies have offered such good prices for so long that they are losing money and they have to raise rates. We’ve been in a “soft market” for so long that…blah, blah, blah.
You zone out. WHAT?! Are you kidding me?! How could my rates go up!? I haven’t had any claims, and there have been no changes to anything on my end since last year. How is it possible that my rates are going up? This guy must not be very good. I need to call that other agent that was promising to save me $$$.
This is a very common scenario in today’s insurance marketplace, unfortunately. It’s true: we’ve been into a soft market and are heading into a hard one. But, what does that even mean? And, why do you care about insurance companies’ profitability? Hopefully, this post explains why this is happening and what you should expect from your insurance agent at renewal this year.
To understand what a hard market is, you need to first understand what kind of market we’ve been in over the last 6-7 years: the soft market. A “soft” insurance market is one that occurs when insurance pricing keeps going down and coverage availability keeps going up. This often happens in poor economic environments when businesses and individuals are looking to “shop” their insurance for better pricing and insurance companies are forced to offer lower pricing to keep and attract new customers. Most analysts would agree that we’ve been in the longest and possibly “softest” soft market ever since 2006-2007.
What inevitably happens is that insurance companies start to experience claims that they were not getting adequate premiums to cover. And, since insurance companies make 99% of their profits in the stock market – which is not doing well either, they begin to lose money. Lots of money. So much, in fact, that they wind up either financially insolvent or are forced to start charging more premiums to cover the losses that they’ve experienced.
Enter the hard market. A hard market happens after a soft market and results in increased rates and fewer carriers offering coverage. Many companies that were offering you 40% savings last year are now forced to charge you a 15% increase – or more. Many times, companies will stop writing certain types of business altogether in a hard market. Professional Liability, Workers Comp, Management Liability, etc. are all lines of coverage that are usually the first for companies to stop writing.
In 2013, it’s very common to see renewal pricing anywhere from 5%-45% higher than it was last year. That goes for the renewal offer from your current carrier, but also from other companies who would “quote” your account. Anything under 10% is reasonable. Higher than that, and you may ask your agent if there are other options – which there may or may not be.
The best way to look at it as a client is that you’ve been getting the benefit of lower-than-normal pricing for 5+ years. We expect the pricing increase to slowly continue upwards for a few more years. You should discuss with your agent a strategy in the event your carrier decides to increase pricing more than 10%-15% and whether other options make sense. Remember, pricing isn’t everything. Many times you’ll find a better price, but at a significant coverage reduction. The important thing is to find an agent or broker that you trust to make sure you are well taken care of – after all, that’s what insurance is for.