Remember the lyrics of the old Bob Dylan song “The Times They Are a-Changin’”?
That is certainly true today, as it has been a most unusual year for all of us! Everything in our world seems to have changed, including the insurance industry. All of which affects dealership bank accounts and profit margins.
Our post-COVID-19 insurance world includes substantial increases in property (which includes inventory), liability, umbrella/excess (which follows liability), employment practice liability, directors and officers liability and cyber.
This encompasses almost every area of dealership insurance, and we can expect those coverage lines not mentioned, like workers compensation, to follow the upward trend shortly. The reasons are rooted in litigation and instability. The insurance market does not like either of these trends and reacts with increased premiums and a dwindling of capacity in the reinsurance market.
When you look a little closer, the insurance market picture becomes clear.
Property and inventory markets were already askew and moving upward due to CAT losses over the past few years. Auto liability and product liability litigation trends are exploding with active solicitation on the airwaves and billboards touting plaintiff’s successes dotting the landscape. Add the massive layoffs with the pandemic, which affect HR issues, and we are seeing an influx of wrongful termination and discrimination claims.
Sadly, the decisions made by dealers during the pandemic to control expenses and keep the doors open can foster not only employment practice claims, but potentially directors and officers litigation.
So, we have a reduction in customer traffic, a slowdown in the shipment of new vehicles to the dealership, increased employee HR issues and substantial insurance increases. It is truly a challenging time to be a dealer or business owner.
Let’s begin the discussion on how to control insurance costs.
Because insurance is a considerable part of the dealership budget, it’s vital to understand the industry trends before the renewal premium arrives on your desk. Prepare yourself by understanding insurance market changes with a subscription to some of the industry publications. This will keep you informed about how the insurance industry is performing, changes in coverage and trends in the reinsurance capacity, all of which affect pricing. With a brief read a couple of times a month, you will know if your dealership premiums will be changing dramatically.
The next step is to ensure that you are the “A customer” every insurer wants. Gain an underwriter’s perspective by analyzing your claims for the past five years. Note the frequency of claims and the severity (claims over $50K). With the analysis, you can determine the average claims amount per year (based on the historical losses). We call this the “Loss Pick.”
The insurance industry uses some basic principles to calculate premiums. First, the carriers have filed rates that provide a ceiling and floor for premiums. Noting that insurers try to underwrite to a 30-40% loss ratio, some quick calculations can tell you approximately where your premiums will be. Understanding, of course, that if your claims history is really good, you will be at the “floor,” the filed rates plus any filed credits. If your claims are very high, you will be at the “ceiling,” the filed rates plus any filed debits. Exceeding the “ceiling” will result in non-renewal, as the insurer cannot charge enough premium (within their state filing) to sustain the risk. We never want that to happen.
Develop your dealership risk management team and meet monthly to ensure your organization has claims under control. Discuss options to keep premiums in check by potentially moving deductibles upward. Decide to assume a little risk in exchange for premium savings by exploring loss sensitive plans such as retentions, retros or captives. It’s all about preparation and understanding.
Remember Bob Dylan’s song and be prepared to weather the storm of insurance trends.