There are many factors that contribute to the rise and fall of insurance premiums.
The marketplace of insurance is very reliant on the supply and demand of the market. Entering 2020, the insurance industry was in what we call a “hard market”. We’ve been in a soft market for several years. A soft market typically means insurance companies are focused on premium growth, as they are making money elsewhere, such as investment income. This allows them to charge lower premiums to grow their market share. In addition, they relax their guidelines. In turn, this means more carriers are willing to provide quotes resulting in lower insurance premiums for insureds.
Over the past several years, rates have either decreased or remained level. However, insurance companies started tightening up last year and began raising rates for 2020. A hard market generally results because insurance companies have not been as profitable as they would like to be. This causes premiums to increase.
Three factors typically impact a hard market:
- Insurance companies are not making money elsewhere on the investment income.
- Because of several years of flat or decreased premiums, losses catch up. Eventually, the insurance companies aren’t as profitable as they like or need to be. In turn, they increase premiums.
- Insurance companies start tightening their guidelines (ex: not providing insurance on buildings that don’t have hard–wired smoke detectors), which limits the number of carriers willing to provide a quote.
Essentially, the insurance companies forgo premium growth in effort to return to profitability. As a result of these factors, insureds typically end up paying more in insurance premiums.
COVID can only make matters worse.
Plenty of businesses have been unable to open their doors for several months and the ones that could see a severe drop in business. Property owners may have trouble collecting rent from commercial tenants because they either closed their doors or simply couldn’t afford to pay rent. Many tenants and unit owners/shareholders could not pay their rent or maintenance fees to the property owners because they were out of work. A large number of businesses and property owners have filed loss of income claims with their insurance companies seeking reimbursement. At this time, almost all of those claims have been denied, but that doesn’t mean that the government may not require them to retroactively pay these claims. That will certainly drive up insurance premiums. Even if the insurance companies are not required, they are still picking up expenses to adjust or deny the claims and many are being sued by insureds for the lost income. This doesn’t include the possible lawsuits down the road for people who sue a business or property owner claiming they got COVID while on their premises. This can only result in increased premiums down the road.
What else could cause insurance premiums to increase?
Losses are the single biggest reason why premiums increase. When agents are quoting insurance for their clients, carriers request five years of loss history. The carrier is then analyzing any claim or incident that was reported within the last five years. If there are too many losses paid or reported, an insurance company can either increase the premium or cancel coverage.
If your building has Federal Pacific Stab Lok Circuit Breakers, this could also be a huge determiner for increased premiums. Circuit breaker panels that were sold by Federal Pacific Electric between the 1950s and 1990s have been known to be problematic. Approximately 1 out of 3 breakers are defective. If a breaker fails to trip when it should, the wires that are supposed to be protected can catch fire. Insurance companies may not provide quotes to buildings with Federal Pacific Circuit Breakers and are requiring that the panels be changed. Some companies are canceling policies if these breakers aren’t changed.
Once these panels are replaced it will create more options for carriers to provide quotes and will drive down the price even further. This could be critical for your building in the next couple of years as the market continues to tighten and rates go up. Although the cost may be an issue, replacing Federal Pacific Circuit breakers will be worth the expense and will broaden the number of carriers that are willing to quote your building.
For more information, please contact @Mackoul Risk Solutions