Over the last couple of years, most business owners have noticed that their insurance premiums have risen, often by 10% to 15%, but sometimes up to 30% and some insurers are no longer willing to offer some insurance products at any cost. Given the ongoing volatility in the insurance marketplace this increase in premiums is just one of the many concerns required to be managed by small business owners.
So why are premiums rising and what can you do to manage this cost to your business?
Insurance Industry Cycle – It’s a hard market for businesses
When premiums start rising and capacity contracts, it’s known as the hard market part of the industry cycle, as opposed to a soft market when premiums are falling, and more insurers are competing for your business and It’s easier to obtain. Currently, we are in a hard market which means that profits have fallen for the industry as a whole.
Structural change and cost cycles are part of every industry. The Insurance Clock is a useful tool to represent where insurance rates are right now and where they’re likely to be heading in the future.
Why are premiums rising?
In the current economic climate, both in Australia and worldwide, three pressures have come together to create the conditions for the current hard market. These are low interest rates, an increasing number of major and catastrophic claims and the rising cost of claims. This has resulted in insurers not making profits and, in many cases, losing money.
1. Low interest rates
One of the key sources of income to insurers is investment income. With interest rates at or in some countries below zero, insurers profits have followed suit, so that other sources of revenue need to be explored. This has directly lead insurers globally to increasing premiums and in some cases ceasing sales of types of insurance or being more selectivity regarding the individual risk’s underwriters are prepared to insure.
2. Increasing number of claims
Over the past few years, Australia has suffered through an unusually high number of major or catastrophic events including bushfires, floods, cyclones and COVID-19. All of these resulted in a higher number of claims for insurers and associated payouts than normal. Catastrophic events also usually result in higher individual claim costs for the insurers. These have been another contributing factor in insurers not making any profits in recent times, another driver in the premium increase.
3. Rising costs of claims
As mentioned, the costs of each claim made following a catastrophe are higher than usual, due to limited resources and workers in the areas impacted. Catastrophe claims are estimated to be $5 Billion in the past 2 years alone. The number of class actions against banks, medical companies and the auto industry have been increasing at 300% over the past few years. This has contributed to Australia having almost as many lawsuits per person as the USA.
Insurance premiums, however, may also increase due to your own business’s risk profile. For example, requiring coverage for any newly purchased assets, changing your business activities or moving to a new location, which has a higher burglary rate than your previous premises. Any activities that change your risk profile may increase your premiums or result in higher excesses.
Insurance advisers help your business achieve the best cover and premium
Rising premiums mean that business owners need to either obtain professional risk and insurance advice or spend valuable time and resources considering alternatives, including reducing insurance cover. However, reducing your insurance cover exposes the business financially, especially during a disaster.
Which brings us to the assistance you can obtain from your professional risk and insurance adviser, who will help you achieve the best cover at the most competitive premium. That’s because insurance advisers have detailed knowledge of your industry that can help to manage and reduce your risks, providing financial security and certainty to you and your business, especially in these uncertain times. Insurance advisers also have access to specialised markets that generally don’t deal with customers directly. These alternative markets may provide lower premiums or less exclusions than other insurers. Hence, insurance advisers can save you time and money and provide financial security.
For help reviewing your business policies, talk to an insurance specialist today.