SMALL BUSINESS : FINANCING & INSURANCE : Insurance Premiums Show Signs of Increasing

Insurance premiums show signs of increasing for the first time in more than a decade, and although the increases do not yet threaten most small businesses, it’s probably a good idea to assume that they will.

As a practical matter, this means that it’s time to pay extra attention to workplace safety. If premiums do turn upward for business as a whole, your best defense is to keep losses down--and that, by and large, means avoiding claims in the first place.

Premium increases began showing up earlier this year for workers’ compensation insurance, particularly for employers with heavy claims. That trend has continued, and more recently the premiums for certain liability coverages have ticked upward too, particularly for manufacturers of consumer items and for businesses engaged in the manufacturing or processing of foodstuffs.

So far, no increases in premiums show up in the cookie-cutter policies sold to many small businesses, including small retail establishments. But that doesn’t mean they won’t, and given the eagerness of the industry to end its long pricing war, you can bet that if insurers get the chance, they will raise prices left and right.

“There’s no question we’re seeing some higher pricing,” says Steven Brown, president of Hoffman Brown Co., a Sherman Oaks insurance agency founded in 1961. The agency’s clients include a number of small and mid-size manufacturers, service businesses and businesses involved in commercial real estate.

“Some businesses with losses higher than the averages for their industry over several years may face higher pricing at renewal time, and if you’ve had really high losses, the insurance company may not renew at all.”

Premium increases of 5% to 10% are not unusual for firms with losses moderately worse than the averages, Brown adds, and they go up from there for those posting heavy losses.

These shifts notwithstanding, the market for business insurance remains soft on the whole. According to the A.M. Best Co.--always a source of authoritative information about the insurance industry--insurers have lost money on underwriting every year for two decades. In essence, insurers make money on underwriting when premiums exceed losses. They lose money on underwriting when the reverse happens, in which case they seek to make up the difference with profits on investment income.

The industry has succeeded in making up the difference and then some every year but one since 1985. Put another way, with the exception of that one year--1992--the insurers made more on their investments than they lost on underwriting.

The good news here is that on the whole, the industry remains profitable and hence flush with capital chasing risk. The bad news is that insurers don’t turn a profit on their basic business, which is underwriting risk.

If that seems odd, it is. Common sense tells you that no business faces a rosy future if it can’t make money on its basic function. The essential commodity of the insurance industry, however, is capital itself, and an abundance of capital gives the industry more than one way to turn a profit. Thus, common sense aside, if capital shields insurers from the bust-and-boom cycles of, say, the mining industry, everybody benefits.

Even so, insurers pray for an end to the pricing war, and it’s a good bet that they will jump at the first chance they get to stop making your business insurance cheaper every year.

And as Steven Brown notes, the practical effect is that you can’t give insufficient attention to safety programming or loss control on the assumption that no matter how bad your record, you will spend less on your insurance next year than this.

Safety programming is the art of preventing losses. Loss control is the art of keeping the cost of your losses from getting out of hand once they occur. By and large, you do safety programming on the shop floor, where accidents happen, and you do loss control in the back office, where you keep an eye on the people who, for example, take care of an injured worker.

Safety programming and loss control are both essential to keep your insurance premiums under control, Brown says, and although both are complex arts, you needn’t fly solo in applying them. Insurers offer a variety of services to help the business owner in both areas, as do many insurance agencies, particularly larger ones. In addition, consulting risk managers earn their keep with similar services.

The important thing is to get all the help you need to make sure that your safety programming and loss control efforts alike are in good shape, Brown says. In this way you give your insurer no excuse to raise your premiums--and if it happens anyway, you give yourself a way to limit the damage long term.

“So far, the market is just suggesting that it’s going to tighten up,” Brown says. “We still see carriers seeking new accounts very aggressively where they like the business. But they’re talking increases--and even if they don’t always act on what they say, they are talking increases for the first time in many years.

“If you do get hit, you’ve got to get back into the business of preventing losses--and controlling them if they occur.”

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Juan Hovey can be reached at (805) 492-7909 or at [email protected].