Softening market a relief for business insurance buyers
By John Prendergast
Market forces at play in the business property and casualty insurance category mean that some buyers can expect reduced
costs and improved quality when the time comes to renew.
This contradicts predictions at the time of the Christchurch earthquakes, that cover would be more expensive and
restrictive for many years. The reality is increased capacity from insurers seeking market share has led to a softening
market for business insurance. But to access possible benefits, organisations will need to demonstrate a sound
understanding of their risk profile and have an active risk management plan in place.
Property and casualty insurance is a category that includes business interruption, material damage and business
continuity insurances. Business interruption is an area where medium to large businesses typically may spend up to 80%
of their insurance dollars – anywhere between $200,000 and $3.5 million a year, depending on the organisation size and
industry.
When the market is soft, insurance companies compete with each other to offer products at the most favourable rates.
They also may be willing to design new lines of coverage or insurance products to meet client needs.
A hard market resembles a seller’s market, where the insurance purveyors have a scarce commodity that companies need. In
a hard market, insurance companies set rates and conditions that are less favourable for buyers. This can mean that
coverage is either unavailable, or substantially more expensive.
Following the Christchurch earthquakes, it was expected that the property insurance market would be hard on buyers in
the medium to longer term. While there were many examples of very substantial increases in the first year or two after
the earthquakes, and there is some continuing caution around certain categories of building, there has been evidence of
a leveling off and in some cases a reduction in premiums recently.
The recent series of earthquakes in Wellington and the upper South Island will no doubt mean some caution will be shown
by insurers; particularly with new business in these areas for the next couple of months. Insurers may impose even more
severe conditions on some buildings in Wellington depending on factors such as age and to the degree they meet the new
building standards. To date, however, there appears to have been no significant commercial claims on insurance companies
with most damage, being non-structural. Providing no significant structural damage is identified and that the
earthquakes tail off as predicted, the market should return to its more relaxed trend.
That should encourage business leadership to at least ask the question: roll over the insurance programme or review it?
If a business has not evaluated the effectiveness of its insurance coverage in the past three years, then there may be
opportunities for significant cover improvements and premium savings for attractive and well-presented risks. This has
been our experience with a wide range of clients since late 2012. For example a number of leading retailers have enjoyed
substantial improvements in both cover and annual cost reductions.
The nature of procurement is such that any supplier will offer sharp prices in order to win business, with the aim of
lifting its margin over time. Unless an alternative supplier bids against the incumbent, there is not the same
motivation to work hard to reduce costs in subsequent years. In the case of insurance, the recommended timeframe for an
insurance review is every three years, with the possibility of extending the arrangement to five years. The bidding
process for insurance is also very complicated because of the process of ‘reserving’, which may be used by some brokers.
The Christchurch earthquakes were an external catalyst for many organisations to review their insurance programmes. It
is equally important, however, that organisations consider all changes, internal and external, that can affect their
insurance coverage – for example, legal or contractual compliance, staff issues, markets, restructuring and data /
systems failure. Beyond the obvious needs for preparedness, such work will help to ensure businesses can present their
insurable risks well to the insurance market, thereby increasing the opportunity to achieve savings and improved quality
of coverage.
To take advantage of a changing market, organisations would do well to revisit their risk profile and update their risk
management plans, thereby demonstrating they have a good understanding of the risks they wish to transfer via their
insurance programme.
John Prendergast is New Zealand manager of The Lion Partnership, which is not a broker or an insurer and evaluates the
efficiency and cost effectiveness of business insurance programmes by objectively reviewing coverage, service and cost
on behalf of large organisations.
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