Businesses should prepare for changes in insurance availability and pricing, according to Gaston & Associates Inc., a nationally known insurance brokerage firm based in New York. Analysts describe this changing atmosphere as a “hard market.”
When the growth in demand for property and casualty insurance increases more rapidly than the available supply of insurance, the outcome is a hard insurance market. In this type of market, insurance is generally more difficult for buyers to obtain, premiums increase and underwriting standards tighten.
Why is the market hardening? A variety of reasons are contributing:
- The recent economic downturn affected Wall Street: Insurance companies rely on investment income to make a profit, since premium alone is typically not adequate to pay claims.
- The effects of terrorism are still being felt: Reinsurance costs to insurance companies were already rising prior to 9/11, resulting in increased premiums passed on to consumers.
- Severe weather may be affecting the industry: The effect of Hurricane Sandy last October is unclear. Weather-related loss events in North America quintupled in the past three decades, according to the giant German reinsurance company Munich Re, though Standard & Poor’s Ratings Services said it expects Hurricane Sandy to have only limited impact on the ratings on U.S. property/casualty insurers, global reinsurers, and certain catastrophe bonds.
The hardening market is already evident in homeowner insurance premiums. They average $1,004 this year, up 5% from a year ago and up 22% since 2007, according to the Insurance Information Institute.
Insurance analysts say modest rate increases for personal and commercial property and casualty risks will extend into 2013, as the overall economic environment is not expected to change dramatically in the coming year.
ALIRT Insurance Research said it expects “gentle premium increases,” but notes there are factors at play that “may well moderate price increases going forward.”
The current environment is better for clients, said brokerage Arthur J. Gallagher’s CEO J. Patrick Gallagher recently. “If you think about the fact that we’ve cut rates since 2003, that’s eight, nine years of rate cuts. Rates are back essentially to where they were in 1999. This is a better environment for clients than to let the balance sheets get to the point where they need a spiked recovery.”
In any case, insurance companies are deep in the process of determining the validity of Hurricane Sandy claims, which may affect service levels for clients who work and do business nowhere near the East Coast.
If premiums rise, business owners can avoid that hit by increasing their deductibles.