Rates on the Rise

The financial crisis means you probably can look forward to higher premiums for business insurance. Here is how you can prepare yourself.

The financial crisis still troubling the economy will have an impact on your insurance costs. It is an impact you will not like.

Over the past seven years, you should have seen your insurance expenses go down nearly every year. That trend is likely over. Many industries have already seen insurance costs increase. Most experts agree that by the fourth quarter of this year, most insurers will raise their rates for most industries.

Most insurers do not consider sewer and drain cleaners and industrial cleaners a highly desired class, so you can expect a boost in pricing. A summary of a report of the insurance industry for 2009 performed by PricewaterhouseCoopers says it clearly:

“Insurers are faced with the most challenging economic environment in decades. The ongoing financial crisis is having a profound effect on the industry and policy holders, and the current ways of doing business are under great stress. Moreover, this is perhaps the critical year in the crisis, and how insurers manage uncertainty and change in 2009 likely will determine their long-term success.”

Connected to finance

The reason for this is fairly simple: The financial services industry is in crisis, insurance carriers are in the financial services industry, and they rely on much of their profit coming from the return on investment of your insurance dollars. Insurance carriers are required to use very conservative investment programs, but even conservative investment strategies are not faring well these days. 

The stock prices of most insurance carriers have dropped significantly over the past year. Many have dropped by well over half of their value, and more. As the media has sounded an alert, the largest insurer in the world is in distress. AIG has had a high stock price of around $70, and it has been as low as 35 cents.

AIG is a lot more than an insurance carrier. The insurance divisions of AIG are solvent under the individual states’ guidelines. The fact re-mains that most insurance companies are hurting, and they will need to raise prices to become profitable again.

Claims and catastrophes will happen. There is nothing the insurance carriers can do to stop claims. Insurance companies project how many dollars from premiums will be required to pay claims and show a profit. Currently, nearly every insurance carrier is in the red. Their return on investments is down, and there is nothing they can do about that. 

The only thing the insurance carriers can control is what they charge for their product, and the price of that product has been down for years. The economic crisis has escalated the impact of the low pricing. Most insurers have been trying to hold the line on pricing, but many experts say that by the fourth quarter, prices will have to go up to make the industry profitable. 

Already happening

The price increases are already showing up in California, which tends to be an indicator of trends across the country. The state bureau that recommends pricing for worker’s compensation coverage is recommending the average insurance rate go up 23.7 percent as of July. A midyear increase like this is the sign of a major problem.

What the insurance carriers will do is yet to be seen. Will there be increases? Yes. Some insurers will be forced to take all of the recommended rate increase. All insurers are strategizing this challenge now. Many are still not sure what they will do.

One carrier is instituting a 10 percent increase effective in August. The California bureau’s recommended rate for the sewer or tank cleaning class code will go up 29 percent. Insurance carriers will try to phase in their increases as much as possible. The key thing to remember is pricing will be trending upwards. 

When you are writing bids for long-term contracts, keep these potential increases in mind. Also keep in mind that not all insurers will have the same increases. Be ready to compare prices among carriers. If you happen to be with an insurer that takes a large increase and you find out four days before your policy renews, what are your options if you don’t have a plan B in place? Be sure to have a plan B, maybe even plan C.

Being prepared

Many businesses are in survival mode. You need to prepare yourself for changes that may come down the road. An unexpected significant increase in expenses can hurt your business. At least if you prepare for it, you can have a plan to deal with it.

The most important thing you can do is require your insurance broker to deliver your quote at least two to three weeks before the renewal date. Tell them it is mandatory to have the quote early. If you tell the broker his quote will not be accepted if it is after the deadline, you will get it on time. Or tell the broker that if you do not have the quote by the required deadline, you will be forced to get other quotes.

The next thing to do is to have your last four years of claims experience (called loss runs) in your hand well before the deadline. If you want to shop your insurance effectively, you must have your loss runs in hand so you can bust out of the gate and get another quote before your policy renews.

You can also shop your insurance with another broker as a backup measure. If you go this route, always remember to get a list of the insurers each broker is going to submit applications to. Make sure the brokers do not deviate from the list, and be positive that none of the insurers receive applications from multiple brokers.

First choice

Give your preferred broker the first choice of insurers they want to use. Give the backup broker any other insurers that are left. To save your own and the brokers’ time, do not use more than one good backup broker. There are not enough insurers that want to insure this industry, so two brokers should be able to blanket all of them.

Be sure to use a broker that insures many drain- and pipe-cleaning businesses. That broker will already know who the hot insurers are for your industry. Discuss your coverage with the brokers – do not just get quotes. Get their recommendations for options available to you. You may want to increase your deductibles or look at other cost-cutting measures to reduce the impact of the increase.

A thorough review by both brokers would be a good thing in this economy. Listen to all the recommendations and pick the components you like best. A new set of eyes is very good at a time like this.

Be prepared for what is on the horizon and the sting will not be nearly as bad as it might be otherwise. Ideally, things will quickly turn around so that the increases will not be too bad. If you are prepared, you will be ahead of the game.



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