State of the Market: Dealership Insurance Industry

Dealership Insurance Industry is rapidly changing, here is what to expect in the upcoming insurance cycle.

The Insurance Market is changing rapidly. As Insurance Professionals, we constantly read journals and articles regarding industry trends and try to adjust to a more difficult (hard) market for our clients.

For the Buying Public, however, the upward movement of insurance premiums may come as an unexpected surprise with huge effects on the budget. Let’s take a look at the market and examine the “hows and whys” of insurance cycles.

First and foremost is the understanding that competition always drives pricing lower. This is true with any product, and insurance is no different. Looking deeper, we find that competition, the sheer number of companies vying for business in a market segment, is fueled by their ability to make a profit. The more profitable a market segment is, the more Carriers are willing to “dive in.”

Looking at the current Insurance Market, particularly the Dealership Insurance Market, we see competition dwindling and pricing moving dramatically upward. The reason is simple, Carriers are losing money. The choice for any business when losing money is to 1) stop doing business (in a particular market segment or location), 2) cut expenses, or 3) raise prices. For Insurance Companies, the options are normally 1 or 3. For most Carriers, withdrawing from a particular market segment is often the least difficult solution.

But, let us dig deeper to find the root cause of the Industry’s financial difficulty and explore the duration of the current “hard market” trend.

Again, focusing on the Dealership Industry, the areas most affected are as follows:

• Property / Inventory
• Garage Liability / General Liability
• Employment Practice Liability
• Directors and Officers Liability
• Umbrella / Excess Liability

Addressing each of these briefly it is easy to understand what is happening:

• Property:
  • Carriers are reeling from the Property Losses of 2019 and the potential Litigation from Business Interruption surrounding the Pandemic. Reinsurance Costs are going up substantially.
• Inventory:
  • Following the Lead of Property, with recent Weather (Wind, Hail, Flood) has caused a general restriction in the market.
• Garage Liability / General Liability:
  • Billboards and Television advertisements tout the Successes of Plaintiff’s attorneys with Auto Liability and Product Liability Litigation. Fearing the uncertain outcome of jury trials, Insurers are more apt to settle Injury claims prior to entering the courtroom. Pricing is affected by these decisions.
• Employment Practice Liability:
  • Discrimination, Sexual Harassment, Wrongful Termination claims have skyrocketed with “high profile” cases and dramatic reductions in staffing due to COVID-19.
• Directors and Officers Liability (D&O):
  • Decisions made by Owners and Officers have directly affected the Employee base and potentially stockholders.
• Umbrella / Excess Liability:
  • Following suit (no pun intended) with the trends in Litigation of the Auto and Product Liability world, the jury awards are driving the pricing upward and severely restricting the Market players.

In essence, when losses (or potential losses) go up and profitability goes down, the level of competition dwindles.  Pricing moves dramatically upward (filling the void of competition) in an effort to achieve profitability.

Giving our (Insurance) Industry a “break,” if you will, any business would react in a similar fashion.

So, how long does this upward trend last… and what can we do in the interim to stabilize costs.

The answer to the first question (how long) is difficult. We do not know. However, that historical industry trends tell us the “hard market” tends to last between 18 and 24 months. As pricing moves dramatically upward, “other carriers” sense profit and want to participate in those highly priced market segments.

This will effectively drive pricing downward, but it will rarely reach the previous levels.

A good example is Property coverage in Florida… a CAT prone state. In the early 2000’s the price per 100 was around $0.30 – $0.35 per 100 of value. With the massive Hurricane activity and subsequent losses in 2005 and 2006, capacity shrunk, and pricing increased over $1 per 100… closer to $2 in some areas.

When the market “settled,” pricing lowered, but stopped at a bottom of $0.50 – $0.55 never reaching the previous low. This was the NEW starting point.

What do we do? Be ready to take “skin in the game” and explore all options. Reducing coverage is never a good idea… but, raising your participation level through Deductibles or Loss Sensitive options must be considered.

To do this effectively, however, you MUST have claims under control. So, the answer for the “hard market” is to shore up your Risk Management efforts. Develop your internal Team and make sure you have your claims processes and procedures firmly in place. This includes documentation of any and all “incidents” and controlling claims before they get out of control.

This strategy requires a certain level of coordination, delegation, and attention and may involve engaging outside Compliance Teams.  But, if the alternative is just accepting the 30% – 40% increase in premiums from the Carriers, it is worth the effort.

Remember, controlling insurance costs involves developing the mindset that Safety is important. It’s important for your Employees, for your Customers, and for the sake of your Budget.

Steven P. Gibson
President of Dealer Risk Services
Program Manager of Dealer Management Group