WHAT FACTORS MAKE PREMIUMS FLUCTUATE
As we have discussed previously, the main premium driver for individual risks is claims.
Hands down, this is the major element underwriters use in calculating insurance costs. However, there are other factors that cause the variances we see in premiums.
You have heard that the insurance market is cyclic. This is certainly true. There are undercurrents that affect the profitability models for all insurance companies and, therefore make premiums go up and down.
The Insurance Industry is a Global Market. The costs of catastrophes thousands of miles away still affect each of us. All Insurance companies rely on the same global pools of capacity for their reinsurance placements. Weather or other devastating events do not need to occur on US soil to affect our market and your premiums.
But, let’s focus closer to home and look at the most recent events that could affect your premiums. In January 2017, Climate.gov reported that the year 2016 was an unusual year with 15 US weather events costing over $ 1 billion each. In total, the events of 2016 caused over
$ 46 billion in damage. Quite a blow for the US Insurance market.
2017 was even more dramatic in terms of insurance related damage.
Last year we experienced 16 weather events totaling over $ 1 billion each with a cost in excess of $ 300 billion.
Other factors affecting premiums can include the stock market and investment income. Liability claims have ‘’long tails,” normally taking months or years to finalize. Insurance companies rely on investment income to offset expenses and help drive profitability. Fluctuations in interest rates and yields can also be a cause of cyclic premium variances.
So while you may not have suffered any recent claims at your Dealership, your premiums could still be rising due to the overall impact on the insurance marketplace. Remember, insurance is the ‘’pooling’’ of risks and each risk indirectly affects the others. When the expenses (such as the cost of reinsurance) for insurance companies increase, they often pass the additional costs along in the form of higher premiums.
Here’s an exercise for you: Look at your historical premiums for all lines and try to find patterns. Then use insurance journals and historical insurance industry data to map out the insurance cycles. In our industry we call then “hard” (higher premiums) or “soft” (lower premiums/buyers market) markets. Understanding the insurance industry cycles will help you understand your premium fluctuations. It may even be interesting and take some of the ‘’dryness’’ out of the “I-word” (Insurance).
Watch for the next info blast…Developing a Culture to Control Premiums!