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Assurances de dommages en entreprise: variation des coûts

Preteur achat entreprise - RCGT

Written By :

  • Simon Julien
    Simon Julien

    Lead Senior Director B.A.A. FPAA Financial advisory

Changes in the cost of insurance are influenced by the flow of capital within the market. What can businesses do?

Typically, the property and casualty (P&C) insurance market is characterized by soft market cycles, with strong competition from insurers, price decreases and availability of coverage, followed by hard market cycles. In these cases, there is a marked decrease in competition, rates increase and the coverage offered is reduced. These variations are caused in particular by the flow of capital within the insurers’ market.

After a somewhat lengthy period of fighting for market shares to capitalize primarily on cash flows from investments, insurers are slow to increase rates in line with rising claims costs.

Subsequently, over a short period, insurers compensate for the shortfall accumulated during the soft market period with large premium increases. Insurers then seek to maximize profitability by revising their underwriting capacity and abandoning certain risk categories, which leads to a significant contraction in the insurance supply.

The new market reality

From 2010 to 2018, the P&C insurance market in Canada was characterized by strong competition. Now we are seeing a significant tightening of this market across all economic industries that started rather modestly in early 2019.

Insurers are united when it comes to imposing changes in terms and conditions by centralizing renewal decisions. The impact of the insurance market downturn seen in 2020 and 2022 is unprecedented, and companies must renew their insurance programs in the turmoil. Renewals may require lengthy negotiation periods, coverage revisions, additions to terms and conditions, as well as changes in insurers, resulting in very significant rate increases.

The insurers’ pricing approach is essentially aimed at ensuring a given level of income, while the underwriting approach is based on a rigorous assessment of the risk to be insured. The current state of the market is shifting the weight of the main factors that are generally considered by insurers in setting rates.

Market prospects

Despite a major return to profitability in 2021 and the prospect of rising interest rates potentially benefiting insurers’ bottom lines, insurance supply remains constrained in the current market and signs the supply conditions are improving are slow to emerge.

However, some stabilization of the market in the medium term (within one to two years) and improved conditions in the long term (within two to five years) cannot be ruled out. The pace of market improvement remains highly uncertain.

What about self-insurance?

In the short term, there is so little insurance available that companies are forced to renew their insurance programs with their current providers.

Furthermore, approaches aimed at revising the risk financing structure by increasing the level of coverage retention do not make it possible to significantly reduce the premium increases. In fact, for insurers, current premiums represent a minimum threshold, which cannot be easily compressed given the risks assumed in light of the coverage purchased.

The cost of insurance can only be reduced significantly by cancelling guarantees (complete self-insurance). Such a decision must be supported by demonstrating its profitability in the medium and long term, but also by a willingness on the part of the company’s management to deal with a much greater variability in the cost of financing fully self-insured risks.

Getting the best possible conditions

Where full self-insurance is not an option, only improved market conditions will result in lower premiums. To take advantage of improved market conditions as soon as possible, companies should take the following steps to obtain insurance coverage at the best possible terms and conditions:

  1. Work with their broker to determine the renewal timeline and objectives with respect to terms and pricing with a plan for follow-up negotiations;
  2. Ask the broker to obtain alternative proposals from other insurers and send the marketing report to them;
  3. Establish scenarios for the amount of retention to be purchased for each coverage;
  4. Have a rigorous process to maintain and document their risk profile. The risk profile should include the following:
    • Organization’s background and governance;
    • Change in revenues and allocation by region and by product or service category;
    • Change in the intensity of activities in terms of production units or services;
    • Change in the number of employees;
    • Description of products and services provided;
    • Clientele profile;
    • Standards and practices;
    • Measures, policies and regulations to reduce the risk of loss and mitigate its severity;
    • List and value of assets to cover;
    • COPE (construction, occupancy, protection and exposure) description of property to insure;
    • Directory of third-party agreements and contracts;
    • Cyber-risk exposure;
    • Change in the loss ratio by guarantee (cost of claims/units of exposure).
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