Have you ever wondered why the cost of your business insurance fluctuates so much? If so, you’re not alone. The fact is the insurance industry historically experiences what is referred to as the “hard and soft” market cycle. This article will help you understand the influences of this cycle and how it relates to your insurance costs.
Soft Market vs. Hard Market
A soft market is reflective of aggressive underwriting along with favorable investment-income results over a period of time. The market started to soften in the latter part of 2004, and continued to soften into early 2009. At the time of this writing in February 2009, most people in the industry believed the current economic crisis would force insurers to focus on underwriting profit, not investment income. With this in mind, it is expected that the current soft market is nearing the end.
The hard market, on the other hand, is the result of poor underwriting and investment income over a period of time, with insurers increasing rates/premiums and, at the same time, adopting a more cautious approach when setting premium levels on new business and renewals. Insurance, in effect, becomes “hard” to place within the insurance marketplace.
Other factors that can influence the cost of insurance include re-insurance and the increasing costs involved in settling claims. During this time, some insurers may withdraw from insuring specific industries, which, due to the laws of supply and demand, drives the cost significantly higher for those businesses. The most recent hard market spanned from 2002 through the end 2004, and we expect the next hard market may have already begun.
Why the Cycle?
Why does this cycle keep occurring? Insurance is a fairly complex industry but, in simple terms, competition and the desire to grow can be blamed for market swings. Insurance companies become more aggressive during a soft market, offering unsustainable premium levels and insuring certain industries they abandoned during the last hard market. Combine this with a sharp drop in the stock market or investment income, and rates will rise and the vicious cycle continues.
The self-storage industry generally fairs better than most during the hard market, due in part to programs that focus on the industry. Industry-specific programs reduce the impact of price increases during the hard market while continuing to make broad coverage available.
This is especially true when a program has been in place for a long period of time and has significant participation and premium volume. Another relative factor is the risk level of self-storage, which is considered relatively low when compared to other industries.
The premium for a single-policy term should not be the only factor when buying insurance. Here are some critical elements that should also be considered:
- Where is the insurance market relative to the cycle outlined?
- Is the insurance company committed to your industry, regardless of the market cycle?
- Are the insurance company and broker financially viable?
- Is the broker familiar with your industry, and does he understand your specific needs?
- How broad or restrictive is the coverage?
- Is industry-specific coverage provided or available?
- What is the relationship between the insurance company and broker?
- What types of value-added services are provided?
Toby Struewing, commercial account executive for Cowan Insurance Group, is a specialist in Canadian self-storage business insurance. To reach him, e-mail [email protected].