IRMI's Expert Tips: Navigating Hard and Soft Insurance Markets

The property and casualty insurance industry is cyclical in nature. Consequently, insurance buyers and their agents and brokers may face a "soft market," a "hard market," or a market that is "softening" or "firming."

A "soft market" is a time when the supply of insurance is greater than the demand. It is a buyer's market. During a soft market, insurers reduce rates, lower deductibles, and offer broader coverage terms in an effort to attract and retain business. Conversely, a "hard market" is a time when the demand for insurance is greater than the supply. It is a seller's market. Insurers typically raise rates (often substantially), increase deductibles, and reduce coverages in a hard market. In a hard market, the workloads of agents, brokers, and underwriters increase substantially, which may lead to processing delays.

Since, over time, businesses and their agents and brokers can expect to experience the full range of insurance market conditions, from hard to soft, IRMI has prepared some tips for dealing with the two extremes: a soft market and a hard market. Soft markets are, by definition, easier for insurance buyers. The focus should be on improving coverage terms, limits, deductibles, and pricing, plus positioning the organization for the next hard market. Hard markets call for an all-out effort to present your organization to insurers in the most favorable light possible, plus anticipating and planning for possible setbacks in coverage terms, limits, deductibles, and pricing.

Tips for Dealing with a Hard Market

1. If you have a great safety and loss control program, document it succinctly and clearly for your underwriters.
2. If you don't have a great safety and loss control program, get senior management commitment to put one in place.
3. Review your claims information to ensure it is correct and up to date. If there have been frequency or severity problems, describe steps taken (e.g., loss control program) to address the problem.
4. Develop a comprehensive database for the past 5 years. Include claims, payroll, sales, and other needed underwriting data.
5. Pay particular attention to reserves on open claims. Meet with adjusters to review any that appear questionable. If there has been substantial development on open claims during the past 12 months, consider commissioning a claims audit.
6. Check your experience modifier calculation to make sure it is correct. Prepare a test modifier well in advance of your renewal.
7. Analyze your concentrations of risk by location and be prepared to show underwriters plans for dealing with catastrophic events that can affect major locations.
8. Prepare a high-quality, thorough underwriting submission using the data and information. Include a great deal of detail, using it to distinguish your account from others.
9. Begin the renewal process early—at least 4 months prior to the anniversary date.
10. Even though you prepare and submit your renewal submission several months out, be prepared for last-minute quotes. Make sure that you are in a position to quickly analyze the alternatives offered, have a contingency plan in place in case the terms are unacceptable, and are able to access all necessary decision-makers as soon as you have the renewal quotes.
11. Analyze your risk retention capability and prepare to assume higher deductibles or move into a loss-sensitive insurance program.
12. Determine your minimum liability limits requirements in case you need to reduce limits because of lack of capacity or unacceptable pricing. Don't forget to consider your contractual commitments.
13. Review your property insurance values to make sure that they will be adequate even if the insurer insists on scheduled per-location limits. Remember to factor in debris removal costs when selecting limits.
14. Meet your underwriters and review your company's risk management program, financial position, and business plans for the coming year.
15. Proactively demonstrate the reliability of your company's financial statements to underwriters, particularly D&O underwriters. Consider involving your CFO in these discussions.
16. Explore the feasibility of using a single parent, group, or protected cell captive insurance company to cover your liability exposures.
17. Develop a strategy for dealing with terrorism exclusions. Be sure to determine if contracts with lenders, customers, or other business partners require you to purchase terrorism coverage.
18. Carefully review the financial position of your insurers to ensure that they are likely to be around when you need them. At a minimum, review the 3-year trends in Best's ratings and S&P ratings.
19. Be diligent about obtaining certificates of insurance from all contractors, subcontractors, suppliers, vendors, and other business partners.
20. Prepare senior management for higher premiums and deductibles. The people responsible for the bottom line don't like surprises.

(This article is taken from the IRMI publication, 101 Ways To Cut Business Insurance Costs: A "how-to" guide for cutting costs in every major line of commercial insurance. For more information, check out https://subscribe.irmi.com/101-ways-to-cut-business-insurance-costs.)