The State of the Dealership Insurance Market
Featured Article in the NADC Defender October 2020 Newsletter
If the year 2020 has taught us anything, it is that when times change, so must we–and times are certainly changing. The cost of dealership insurance is moving upward, and quickly. Without following the industry news, it may be hard to understand why. The following will examine the current market and discuss how to mitigate rising insurance costs.
Historically, the insurance industry moves in cycles hitting highs and lows every seven to ten years. In our industry we use the terms “soft market” and “hard market” to describe these fluctuations. The soft market provides aggressive pricing and flexibility from the carriers while the hard market exhibits the opposite with much higher pricing, increased deductibles, and more restrictive coverage forms.
The drivers for these market changes are almost always dictated by competition which is, in turn, fueled by the carriers’ ability to make a profit and project to sustain those profits over a period of years. The cycles are gradual and do not happen quickly, even though to many, it may appear that they do.
A short review of the insurance industry, with the attention on dealership insurance, will uncover the factors involved in these market shifts.
First, a little about the industry. Every insurance premium dollar is comprised of the administrative cost and the claims fund. The administrative costs range from reinsurance costs to legal and accounting expenses and everything in between. Essentially, this is the cost to “run” the insurance company. Insurers typically hold their admin costs to the low to mid 40 percent range, leaving 55 percent or so (of the premium dollar) to pay claims.
The “actual” claims experience plus the administrative costs comprise the combined loss ratio about which we hear carriers speak. Because the industry invests the claims fund money and receives investment income, insurers can push the “Combined” to 103 percent or 105 percent and still be profitable.
When claims costs increase, either from catastrophe losses (which affect the reinsurance market and capacity) or litigation trends, the Combined ratios shift upward, causing a loss in profitability. This results in premium increases or market exits by the carriers.
We see the latter (market exits) frequently in the dealership insurance arena when the market hardens. Carriers that once considered dealership insurance a profitable venture decide otherwise and withdraw from the segment altogether. This creates a void in competition and allows the pricing for the remaining carriers to move further upward. A look at the claims trends of the past few years reveals the driving force and the insurance market responding accordingly, especially in the dealership arena.
When discussing losses, it is important to think of the insurance industry as a global market and not confined to one geographic area, or even the United States as a whole. Remember that insurance carriers purchase their reinsurance from this global market, so losses in Europe or Asia still affect the reinsurance costs for domestic insurers.
Let’s look at the dealership insurance lines that are currently being affected:
- Property (which includes inventory) market pricing has been moving upward due to CAT (catastrophic) losses over the past few years. We all see the various events on the news, but not often the impact on the insurers. I would suggest a subscription to some of the insurance journals or industry publications to keep abreast of the effects of losses on the global and domestic markets.
- Auto liability (which includes garage liability) and product claim litigation trends are exploding with active solicitation on the airwaves and billboards (touting plaintiffs’ successes) dotting the landscape. Additionally, increases in pricing for auto and product liability directly affects the pricing for the umbrella markets as the excess pricing is based on the underlying costs.
- The employment practice liability market has been askew as well with a series of high-profile cases involving allegations of harassment in a wide variety of industries: political, entertainment, sports, and business. The result is an increase in the frequency of EPLI claims at the business level and a dramatic increase in premiums and deductibles.
- Directors and Officers coverage tends to follow EPLI in availability and pricing. Coverage in this area had previously constricted with the banking industry issues several years ago. Today, the number of carriers participating in the D & O market is a handful and pricing has increased dramatically.
Dealership insurance has traditionally been a direct writer driven market with the “Big 3” carriers competing for the bulk of the business. The market appetite has normally been complemented by a flow of various programs and regional carriers providing four to six insurance carrier options to the dealer community.
However, with the losses mounting, we have seen the curbing of appetite and/or withdrawal from the dealership market by many of the carriers, especially in the inventory segment. Again, the void in competition driving pricing upward at a rapid pace.
So, how does a dealership prepare for and mitigate insurance market shifts? The answer lies first in developing an understanding of the (insurance) industry, and second in gaining control over dealership losses.
Achieving an understanding of the insurance industry sounds daunting but is actually attainable, even for those outside the industry. Granted, the forms and coverages may be a bit complex, but the operation of the industry as a whole is not unlike any other market segment.
Noting the aforementioned combined loss ratios that carriers desire, we can find the ideal customer in the 30 percent to 35 percent loss ratio range. Insureds within these parameters can temper (although not escape completely) premium increases. This range and under makes a dealership the “A” customer all carriers desire.
Next, identifying market trends is essential to projecting insurance costs. Realizing when the market is hardening provides the opportunity to look at loss sensitive options and higher deductibles to control costs. Conversely, gauging when the market is soft affords the dealership the opportunity to negotiate to the fullest extent, driving pricing downward by knowing that the underwriters have a little more premium flexibility due to competition.
Understanding the market is a powerful tool in the ability to control insurance costs. As mentioned previously, a subscription to the various insurance industry publications will put the dealership in touch with market trends.
Finally, controlling dealership claims is the best way to secure viable options. Absent hiring a competent Risk Manager, it is essential to develop an internal team to gain control over the frequency of claims. Dealership insurance prices are based on the number of claims per year rather than the occasional severe loss. Controlling frequency not only helps control insurance costs at renewal, but also limits the deductible costs and the loss of productivity from employees when an injury or accident occurs.
By limiting losses and gaining the ability to accurately predict the annual cost of claims, the options to successfully participate in loss sensitive programs opens up for the dealership. These options include large deductible plans, retro and retention programs, and captives. Each of these is a unique and premium savings platform that allows participation in claims and, with captives, the potential for a return of underwriting profits.
I encourage you to be prepared for a changing insurance environment by understanding insurance market trends and your claims. Look to the future and find an avenue to truly take control of your insurance costs with strong risk management practices and securing a loss sensitive program that fits your needs.
Steven Gibson is the President of Dealer Risk Services, Inc., a specialty firm that provides insurance expertise to the Automotive Industry nationwide. Over the past 30 years, Gibson and his firm have been a consistent leader in the creation of products and programs specific to the needs of the Dealer community. He is a frequent contributor to numerous industry publications and is widely recognized for his knowledge of Dealership Insurance.