External Factors Affect Premiums

There are so many factors that will affect how much a business owner will pay for premium.  She or he should be aware of is that certain external factors can and will affect the cost for insurance. The external factors that drive how much premiums are include:

  • How well the insurance industry is doing on investment income.
  • Is their insurance operation profitable?
  • Is there growth or reduction in the economy?
  • What is their historic results of the industries that they serve?
  • What does their computer model revel on each policy that they are writing?

Many forms of insurance are subject to cyclical swings.  Losses soar for surety companies during major economic recessions; however, they prosper during times of prosperity. Workers Compensation experience has seen adverse results during times of high unemployment.  Seasons of extreme weather with heavy catastrophe losses affect property insurance premiums.  These insurance market fluctuations are called the Hard vs. Soft insurance markets.

Soft Market vs. Hard Market

The “soft market” pricing is the industry term when the pricing is on a decline. The “hard market” cycle is one where premiums are on the rise. If the insurance company can not make money on the policies sold, they must make money from their investment income. If neither is earning money, then expect the “hard market.” If one of these factors is positive, then the premiums a typical business pays will probably be stable or may be on a decline.

If the insurance pricing cycle is soft, the insurance industry may provide coverage enhancements (or coverage features) to help differentiate themselves in the market among their competitors.  These special features attract or encourage policyholders to maintain their coverage. Examples of these special enhancements will be provided throughout The Southern Agency blog.  Recently, I was competing against an outstanding agent and was able to obtain a copy of the coverages that they were offering, and I spent an entire afternoon performing a comparative analysis why my coverages were different.  I won the business because, in this particular case, our coverages were superior; so, these coverages are important, and a business owner needs to pay attention to them because they can make or break a business.

Hard or Soft, the business must understand and budget their insurance premiums properly, otherwise, uncertainty and unpreparedness can literally kill the business.  There will be premium examples in the blogs that are designed to help the reader understand his or her own exposures and possible costs.  This is followed by segments on how premiums may be reduced as well.  You will learn the importance of conferring with your agent on different options of deductibles, safety devices, and policy limits.

How Much Insurance Should a Business Carry?

When I first entered into the career of insurance, my dad showed me an article about a major accident that had occurred. The essence of the article was about the lack of adequate insurance limits a particular contractor had to protect himself.  The sad part of the article was that an insurance agent was sued as a result of the post accident litigation. The allegation was that an agent’s recommendation of what was “adequate” turned out to be very inadequate coverage.

After reading the article, my dad told me that his recommendation to his clients had always been that a contractor could “always purchase more insurance; however, that no contractor could purchase enough insurance if the circumstances were bad enough.” To this day, that has stuck with me and I say that almost daily to my clients.

It is also my hope that these blogs will assist you make intelligent decisions on your insurance coverage. Thank you for tuning into our blog posts.  I hope you find the following blogs help you and improve your business conditions.

If you’d like to review your business or personal insurance, please call us at 423-763-1111.  We hope to answer your questions and serve you!