After reading the insurance trade journals for the last month, it seems that the operative insurance term of 2012 is firming. Firming is, “insurance-speak” for slowly raising rates. A firming market is one where insurance rates go up at a pace that insurance consumers may deem acceptable, under 10%. A hardening market is one where rates increase at an even faster pace.

“After six years and eight months, the soft market cycle has finally broken,” Richard Kerr, CEO of MarketScout, said in a statement on December 6, 2011.

What insurance execs are saying about rising rates in 2012

The news of rising insurance rates is exciting to insurance executives anxious to add to their bottom lines. Since 2004, dealers have seen stable to improving property, casualty and workers’ compensation rates, thanks to plenty of worldwide market capacity and competition amongst insurers. Taking these insurance executives at face value, they are absolutely giddy about firming rates. Chubb (who offers the Seafire dealer insurance program) CEO John Finnegan said during the Oct. 20 earnings call that his company is “pleased with the continued firming in the market.”

Travelers Chief Executive Jay Fishman, at a Goldman Sachs financial-services conference, said his company had increased prices for business-insurance clients by 5.2% in October and 5.8% in November, the largest rate increases in several years. “Our principal tactic right now is to drive rate,” Mr. Fishman said. “There is a sense of optimism building around this, and a notion that we can continue to drive this strategy successfully.” Additional information provided by Fishman revealed an 8.2% increase in November for mid-market business which would include many dealers.

Of course, insurance agents will join this chorus because as premiums rise, so do their commission checks, without selling a single piece of new business.

Why are rates going up now?

Any time the insurance market moves in lock step, there is a combination of events in play. In this case it seems to be the result of continued low investment returns and interest rates exacerbated by higher than normal catastrophic property losses.  A.M. Best, the insurance rating company, reports the pretax losses from catastrophes through the first nine months of 2011 at $38.6 billion in the U.S. alone. Add to this, losses in Europe and Asia (historic earthquake in Japan and floods in Thailand) and you begin to see the magnitude of the problem.

Why is the market only firming instead of a full fledge hardening like dealers saw between 2000 and 2004? Again, events conspire. First, there is still plenty of insurance market capacity which dampens premium increases. Second, the economy makes it hard for many businesses to stomach premium increases. Third, while the profit picture for insurance companies may not be as rosy as they’d like, it has been reported that still on average, they are making around 6%. Hard markets are much more likely to occur once returns go below 0% and the pressure to raise rates becomes insurmountable. Another bad year of property losses coupled with low investment yields, and we could be there.

How does this affect the auto dealer?

The most challenging time for dealers is at the beginning of a deteriorating market. It is easy to assume that the renewal process will be as it has been the last six years. Get a couple of quotes and everything will work out, right? Then bam, remember 2002 when those big premium increases hit and you were left with nowhere to turn. Now is the time to be aggressive and bid your coverage to all the available players. Competition works.

Here’s what we are seeing at Austin Consulting Group. As you know, we do not sell insurance. We analyze quotes from all segments of the dealership insurance market for dealers across the country.

• In the second half of 2011, we too began to see a rate firming for our clients with average increases of 2% – 5% after aggressively bidding all coverages.

• Dealers with higher than average losses are seeing disproportionally higher premium increases.

• In stable markets, nearly 25% of our clients change carriers to achieve the best insurance deal. Since June, we have seen an average of 40% switch carriers for a significant portion of their coverage package.

• Some insurers are again hesitant to write policies in coastal and flood-prone locales, especially in the northeast.

• Carriers that have traditionally written entire dealer packages are now going to outside carriers for EPLI and vehicle inventory.

• More dealers are finding the need to separate their coverage package and buy from multiple insurers to achieve the best pricing and coverage. Effective insurance buying becomes more complicated.

• Carriers are increasing deductibles and limiting some coverages to mitigate premium increases. This may not be best for the dealer.

• Dealers’ Physical Damage insurers are either significantly raising or eliminating aggregate deductibles all together. Look for some carriers to offer percentage (10%-30%) of total loss deductibles for weather related claims.

Austin Consulting’s prediction for 2012

For 2012, we expect something of a schizophrenic insurance market. Some insurers will still be looking for new business and as a result, offering better pricing to new prospects than current clients. Other carriers will try to hold on to profitable business with competitive rates while “running off” unprofitable business by excessive increases. In those cases where dealers have been priced under market, we expect to see premiums rise to market rates. Insurers who have not been competitive over the past few years may once again find themselves competitive, as premiums rise.

In all cases, insurers will be looking for premium increases where they can. The prudent dealer is left with little choice but to aggressively bid their insurance coverage to as broad a selection of insurers as possible. This is the only way to be absolutely certain you have the best possible pricing in any market. Start around 90 days out. Even if a 10% increase seems palatable, every dollar you could have saved is lost bottom-line profit. Competition keeps price increases in check. You never know which carrier will step up to the plate. But if you wait to see your renewal, it’s too late.