Some of you may have noticed that I am in Boston based upon the post, The Boston Insurance Library. I was invited to a CEO Summit at Harvard this weekend, and the CEOs all had this question: “What is up with our insurance premiums? Can we cut the costs?”
Insurance premiums are up for everyone. Business owners and executives, as well as homeowners, are going through increased rates and having to deal with strained budgets. As a business owner in various states and a homeowner based in Florida, I understand the frustration of dealing with double-digit increases in insurance bills.
When these CEOs asked me why their costs for property insurance rates were going up, I told them this:
The rates are going up for a number of reasons which are largely out of your control. If you look at the basic economics and how insurance companies price their product, you will find that the amount of losses, which is referred to as ‘frequency,’ is rising. The average amount paid per loss is also rising, which is known as ‘severity.’ When the frequency and severity rise at the same time, we have the current situation, which makes insurers raise rates to remain profitable.
The frequency of losses is increasing largely because we are having more storms and natural disasters, which are obviously caused by climate change. Your businesses are located in growing population areas where these disasters occur. This has increased the total number of losses which have to be paid.
Further, the cost of repairs and rebuilding have risen above the already high rates of inflation. Some of the rebuilding costs soar when we have mass disasters because the demand for builders and materials far exceeds the normal capacity. Simple inflation of construction costs is causing premiums to rise. You cannot control inflation construction costs, but those contribute to higher premiums.
Most of this is fairly simple economics as to the cause of rising insurance prices. Just like your business, insurance companies have to make money, and when frequency times severity do not equal profits, the charge for insurance will go up. The complex and often costly issue is what to do about it.
The thing about Harvard is that the successful business people showing up to learn how to be even more successful, and the professors who are so brilliant are not just from the United States. What I found when talking with CEOs from all over the world was that all of them were experiencing increased insurance costs, and they asked what they could do about the problem of increased costs.
The point of this blog, before I start to tackle the “what can you do to cut your insurance cost” question, is that the insurance industry is raising its costs to commercial and residential consumers all over the world. It is not just in one state of the United States, nor is it just in the United States. We are in a worldwide “hard market” where insurers are increasing costs to all customers.
Again, the more complex question to answer is what to do about it.
Thought For The Day
You can tell whether a man is clever by his answers. You can tell whether a man is wise by his questions.
—Naquib Mahfouz
