Business owners often grapple with insurance premium increases without realising what leads insurers to hike premiums.
This is according to Malesela Maupa, head of insurer relationships at FNB Insurance Brokers, who says understanding some of the common factors that impact the price of premiums can help businesses plan ahead for unavoidable increases when drawing up their budgets.
He unpacks five reasons why insurance premiums have doubled over the past five years:
* Claims frequency and severity – there has been a substantial increase in the frequency and severity of losses in the past five years, which has had a huge impact on risk underwriting and insurance premiums. Insurers operate on a principle of insurance that is very simple, whereby they pool premiums from many clients with exposure to similar risks and pay for losses experienced by those clients in the same category. However, in order for insurers to be profitable, they work on acceptable loss ratios ranging from 60% to 70% between collected premiums and claims paid. These loss ratios have been on the increase as a result of a rise in claims paid.
* Inflation – the average cost of claims has considerably increased over the last couple of years due to technological advances, the cost of materials used to make products more durable, complex and expensive repair methodologies, modern methods of construction, more technical expertise requirement to be compliant and increasing building rates. This is linked to the Consumer Price Index (CPI) which has increased from 85 index points in 2014 to 105 index points in 2018.
* Economic downturn – tough economic conditions have placed an enormous strain on business’ balance sheets, and thus they cannot carry higher excesses which pushes premiums to be higher as insurers will be picking up more small value losses that occur more frequently. “Furthermore, during tough economic conditions there is often an increase in the number of liquidated companies or companies reduce or cancel insurance covers to try to survive. This ultimately reduces the pool of clients paying premiums and results in clients paying higher premiums,” says Maupa.
* Extreme weather conditions – recently, we have seen an increase in the number of catastrophic losses due to extreme weather events affecting businesses and ultimately insurers and reinsurers. This has significantly increased the re-insurance premiums insurers have to incur and unfortunately this cost is passed on to customers.
* Changes in legislation and regulations – the regulatory environment has become more stringent and in order to comply businesses have had to incur more costs. For example, a huge proportion of the commercial property insurance market is dominated by real estate, and with an increasing requirement for well designed, environmentally friendly properties and building methods, fire-resistant properties and energy efficient properties have fortunately reduced premiums from a risk management perspective. However, the cost of the materials used and technical expertise required to build and manage these properties has been increasing and insurers utilise these high values to charge premiums on these properties.
“Although the above factors may vary depending on the nature of the business being insured, they provide a good guideline of what insurers take into account when considering increasing premiums,” Maupa says.