Got to Go Round

As any veteran of the insurance business will tell you, the insurance market is cyclical. During a period in the mid-1980s when a very hard insurance market left many nonprofits and public entities without insurance coverage, there was a flurry of activity as affected organizations scrambled to find alternative markets. Many created their own insurance facilities by setting up risk retention groups, risk pools, or captive insurance companies. Then the crisis eased and an unprecedented period of declining prices set in. During this period, which spanned from around 1987–1999, the cost of insurance steadily decreased while coverage expanded. Some even said that the insurance market had changed forever and that the cycles were gone thanks to the pressure that the alternative markets had placed on traditional insurers. But to paraphrase the popular song, "What goes down, must go up." There are strong signs that the cycle is turning.

Many insurance companies are suffering substantial losses due to natural disasters, increasing medical costs (despite managed care), other inflationary pressures, and highly volatile financial markets. After many years of underestimating the final costs of their losses, insurance companies are increasing their loss reserves to cover anticipated loss payments. A few large insurance companies have been downgraded by the financial ratings agencies.

"Some even said that the insurance market had changed forever and that the cycles were gone thanks to the pressure that the alternative markets had placed on traditional insurers."

In addition, the Federal Reserve Board has been slowly but surely raising interest rates in an effort to slow the economy. If insurance companies cannot continue to receive a high rate of return on their investments, they must price their accounts to realize an underwriting profit. These are the factors that often lead to a tighter or "harder" insurance marketplace. The key issue for nonprofits is what effect these changes will have on the availability, pricing and nature of coverage.

Many nonprofits have not yet felt the impact of the changing marketplace. The number of companies competing for nonprofit accounts remains at a record level. At renewal time, however, many organizations will be facing a premium increase. In addition, insurance companies are requesting higher deductibles or further limiting coverage.

Although the changes may be small for your organization this year, be prepared for the trend to continue and perhaps accelerate. In the near future, perhaps all nonprofits will pay higher premiums and may receive more restrictive policy forms.

In the last decade, many insurance companies committed their expertise and resources to the nonprofit sector. We hope that these companies will not abandon nonprofits in this changing market. Meanwhile, here are some things you can do to stay a step ahead of the game:

  • Talk to your insurance broker or agent about trends that he or she is seeing in the market.
  • Get a jump on your renewal. As unbelievable as it may seem in this electronic age, it can take as long as 60 days to receive a quotation. Ask your agent to start early on your renewal and get multiple bids.
  • Document your risk management practices. A nonprofit that can demonstrate a commitment to risk management and show a favorable loss history will be more attractive and eligible for better rates than one that is a claim waiting to happen.
  • Finally, make sure that your insurance professional is someone who understands the needs of your nonprofit and can effectively present your case to the underwriters.

The spinning wheel continues to turn. Keep alert and hang on tight until what goes up starts to come down again. Whenever that is.

© 2003 Nonprofit Risk Management Center