Balancing Costs in a Tight Insurance Market

Joseph Catanese

Until recently, the property and casualty insurance market has been deemed the most competitive ever. This has resulted in a "soft" market characterized by intense premium price-cutting between carriers because of the fierce competition in virtually every segment. Businesses, of course, have benefited from this soft market for several years through low insurance prices.

However, it appears that the market is starting to "harden" again. For companies, this equals higher insurance premiums. Under-priced insurance coupled with poor financial results from some carriers have set the stage for price increases. Additionally, the insurance industry has seen its share of mergers and acquisitions, which has consolidated some of the carriers.

Insurance brokers have seen rate increases for small, medium and large commercial accounts, according to the Commercial Insurance Market Index for the second quarter of 2000. The increases are occurring blatantly in property and casualty lines, including commercial auto, workers' compensation, property and general liability.

Overall, brokers are seeing increases of between 5 percent and 20 percent in clients' insurance premiums. However, the latest industry data indicates that medium-sized businesses are experiencing the most significant increases. And specialty lines of insurance - especially for medical malpractice, nursing homes and other healthcare facilities - are realizing increases as high as 200 percent.

Consequently, companies should prepare themselves when renewing insurance. When issuing or renewing a policy in a hard market, insurers will look closely at a company's risk factors. Businesses with poor loss experience can expect more significant increases. Insurers also will be reviewing past losses and asking questions to help them understand their potential risks when issuing or renewing a policy.

Businesses should plan ahead and have their renewal specifications together early. Some companies may be willing to accept more risk retention, or higher deductibles to obtain better overall rates. Insurers will examine their risk retention and rates as they review renewals.

The insurance industry expects a hard market to have minimal effects on most of its immediate buyers. While increases may make waste companies thankful for the business that they're in, it shouldn't make them complacent. For any industry, a hard insurance market is an alert to be more cognizant of exposures. Increasing risk management efforts can keep potential exposures managed. For example, they can:

- Identify a business' risk exposures. A thorough risk assessment can help identify ways to control liabilities. For instance, how are materials disposed of and handled? What are employees' driving records? What are the risks of specific pickup routes? What are the risks of the business' location?

- Make risk management routine. In daily activities, it's important to incorporate effective procedures, such as recordkeeping, personal safety equipment, material handling, disposal practices and reporting procedures. Also, companies should communicate the importance of these procedures to employees.

- Obtain employee support and participation. An employee's actions can be a liability. Therefore, it's important to provide the proper equipment and training and communicate responsibilities to employees.

- Examine potential risks. Risk management is an ongoing process. Businesses need to continuously monitor and manage potential exposures and seek ways to improve the risk management process.

- Prepare for the unexpected. Despite the best precautions, accidents happen. Businesses always need to be ready for potential incidents. This requires emergency response plans with different scenarios prepared and properly communicated.

- Create partnerships with the right people. In the event of an environmental incident, make decisions immediately. Prequalifying remediation contractors, third-party administrators, legal counsel, etc., can help to contain liabilities.

- Determine the financial benefits down the road. Reducing risk helps control insurance costs. While employee training or safety programs, or new, safer equipment may seem costly, annual insurance premium increases of 10 percent or 20 percent are not helpful to the bottom line.