Categorized | Insurance

Rates are Rising

News flash! Business insurance premiums have gone up. According to MarketScout rates increased an average of 5% last month. Commercial auto rates increased the most, followed by commercial property and general liability. The rate increases were generally larger for small businesses than for large ones.

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If your insurance premiums didn’t go up last year you can consider yourself lucky. Some insurers increased rates by about 5% in 2012, primarily on workers compensation and property insurance.

Why are insurance premiums rising? Insurers make money in two ways. One is through investment income. Insurance regulators require insurers to keep a substantial portion of their portfolio in cash and other short-term investments. Because short-term investments are low-risk, they don’t generate much return. You already know this if you have a savings account or money market fund. Interest rates are so low you aren’t making much on your investment. Insurers are in the same boat.

Insurers also make money by collecting premiums. Since about 2005 the commercial insurance market has been “soft.” This means that many insurers are offering the same types of coverage. When many insurers compete with each other for business, rates are pushed down. You may feel like you pay a lot to insure your business, but rates have actually been on the low side for the last eight years.

These days many insurers (particularly those that write property insurance) are feeling a bit squeezed. Over the last couple of years insurers have paid out billions of dollars in claims as a result of catastrophic events. For example, in 2012 there were Hurricanes Sandy and Isaac in the East, several major firestorms in the West, and numerous “super cell” thunderstorms in the midsection of the country that spawned damaging tornadoes. There was also a derecho that swept across the eastern half of the country in late June. Until I read the news reports I’d never heard of a derecho. The term means a thunderstorm system that generates very strong straight winds.

The upshot of all this is that insurers have decided to raise rates a bit. The rate increases are expected to be modest (in the 5% range). I have not seen any predictions of the insurance market becoming “hard”. A hard market occurs when few insurers are writing coverage and prices increase dramatically. The market may be “firming” but most industry experts agree that it is still very competitive. Rates should still be reasonable and there’s no reason to panic.

Finally, if you are a contractor or own a company that employs contractors, be sure to read my new article on certificates of liability insurance. Certificates can cause major headaches, so it’s important to understand their what they can and can’t accomplish.



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