Risk Management
It's True: The Sky is (Well, Maybe)
Falling (A Little Bit)
By Roger Beery
In theFebruary 2000 issue of DEALER magazine, I wrote about a possible change in the Dealership Insurance market. I closed by saying that though prices seem to be going up this could be a bit like a stock market "correction" and everything may return to normal. I am writing this piece in early May. The Nasdaq is down another 146 points today and both the insurance market and stock markets continue to "correct." Personally, I saw no need for a correction in either market.
During my workshops at NADA 2000, I had any number of dealers tell me of their premium increase, coverage reductions and unexpected cancellations. Many were caught off guard. In the states where insurers are not required to notify policyholders of increases, they came at the last minute, leaving the dealer with few alternatives. Since the last article was written, one insurer notified their dealer clients they would not renew any coverage. My sources tell me that another company may be considering the same approach. Right now it seems a lot of the insurance carriers are staring at each other waiting to see what the other is going to do. The insurance marketplace could be a minefield for monthsto come.
Here is what we are seeing today: The major dealer insurers fall into two camps. First is the group that is raising prices. Second is the group that is keeping prices at a reasonable level but increasing underwriting requirements. The second group is keeping the first from raising prices as much as they would like to. The first group continues to provide a market for those who can not meet the second group's stricter underwriting standards.
As for the guys who are raising prices, they are trying to get all they can. However, if there are other bidders they often keep their increases in the 10% to 15% range. A well-organized bid process will often bring in bidders at a premium closer to the expiring quote. The underwriting guys are presenting a few new hurdles for you to jump through before they will even quote you. Some are looking at four years of loss experience instead of two or three. This simply means that bad claims stay with you longer. Some will not quote if your losses exceed 30% to 40% of your premiums. Finally, we are seeing insurers looking at the number of demos. If there are too many, no quote. To be honest, this is long overdue. Demos are a huge insurance risk.
There is a silver lining in this cloud. Since prices are going up along with underwriting, some of the smaller players in the market are starting to show a stronger presence. By smaller players, I don't mean small companies, just ones with a smaller share of the dealership market. Their added competition will help to keep the market from misbehaving too much. However you won't find these carriers unless you're out in the market, bidding your coverage.
Two areas of the market where we are seeing great volatility is in Workers' Compensation and Floor Plan Physical Damage. I won't spend a lot of time on Workers' Compensation because it varies wildly from state to state. However, do not ignore this coverage in your bid process. The increases in this line can be dramatic, especially in California.
For the first time, we are seeing manufacturers' floor plan sources rate this coverage based on past claims. For dealers who have had insured floor plan losses, the premium increases can be high. However, if you bid this coverage with the rest of your package you may be able to mitigate this increase. The bottom line is that the old rule that the manufacturer's insurance is cheaper doesn't always work in today's choppy market.
Roger Beery is President of Austin Consulting Group Inc., a firm specializing in dealer insurance consultation. rbeery@dealeronline.com
