Despite a hard insurance market, Power & Utility businesses can engage 4 best practices to manage their risk and keep rising insurance costs at bay.
The rapidly evolving insurance market will mean rising costs at this year’s renewals for many power and utility companies.
In most cases this rise, dubbed a hard market, can be directly tied to the attrition of catastrophic weather claims as well as social inflation, or an increase in litigation and high-priced, plaintiff-friendly settlements across industries.
When the pandemic spread across the globe and civil unrest swept the U.S., these costs were compounded, as global insurance companies struggled to pay out unforeseen claims and defend the undefendable.
According to Marsh’s Global Insurance Market Index, overall insurance pricing increased 20% in the second half of 2020. In many cases, that’s just an average. Pricing for specific coverage lines is often higher. For example, Marsh estimates professional lines premium costs to be up 40%, while public company D&O coverage is up 60%.
Unfortunately, the hard insurance market isn’t going to reverse itself any time soon. In fact, depending on how the coronavirus pandemic continues to play out, there’s a chance it’ll get worse before it gets better.
What is a hard insurance market?
A hard insurance market is a market cycle that occurs when insurance companies impose tougher underwriting standards, reduce coverage limits and are more selective in the risks they’re willing to insure.
The result is a reduction in coverage options, changes in scope of coverage and a rise in policy premiums. A hard market is caused by a number of factors, including increases in frequency and severity of claims.
What can Power and Utility companies do to manage costs during a hard market?
There are a number of risk management practices power and utility businesses can engage to both minimize exposure to risk and simultaneously ease the total cost of insurance.
Consider the following best practices for managing risk and rising costs in a hard market:
- Establish a culture of safety across your organization. Easier said than done; doing so requires both big-picture actions like instituting regular training, safety demonstrations and inspections as well as job-site precautions, including simple but critical tasks like ensuring all equipment is returned to its proper place every time it’s used. Consider instituting a twice-daily check-in, or “huddle,” before each shift begins and when it concludes, requiring everyone to pass in front of their manager’s eyes. In many cases, this simple addition can drastically reduce the potential for Workers’ Compensation claims.
Closely follow local and national COVID-19 recommendations and requirements in your facilities and on your job sites. Set up sanitation and temperature-checking stations to screen each worker when they arrive and provide them with proper personal protective equipment (PPE).
Avoid supply chain risk by instituting a regular review of all vendors’ and partners’ insurance coverage as well as the COVID-19 and hazard prevention in their facilities and across their fleet operations. Partnering with businesses that don’t share your priorities can open you up to unnecessary third-party exposure, should their operations be deemed deficient in any way.
For businesses on the U.S. coasts, underwriters will also want to know plans they have for a potential compound disaster, should a natural disaster happen during the pandemic. Such an event threatens to reduce fleet and team response times and may leave the power and utility provider operating at reduced staff. Make sure your team has a plan in place.
- Re-assess head count, fleet and facilities. The coronavirus pandemic has caused power and utility companies to build in added flexibly to their operations. Due to the critical nature and demand of the work, a number of challenges have surfaced during the pandemic. For example, supply chain for critical parts may be affected; it’s likely there is a decrease in personnel available for emergency deployment due to illness and or local stay-at-home orders. For these reasons and more, power and utility companies have to be more agile than ever.
Communicate any changes in your organization to your underwriter prior to obtaining a quote for new coverage or renewal, as each operational nuance can make a difference in policy costs and coverage scope.or example, if one plant recently retired some vehicles, reduced its workforce or pivoted heavily, it may be possible to reduce premium dollars accordingly. On the flip side, not disclosing additional fleet vehicles or job functions means the organization won’t be covered for them either.
- Go out to market early. In a hard insurance market, it’s especially important to commence renewal discussions earlier to make the process as efficient as possible for all stakeholders – risk managers, brokers and underwriters. While 60 or 90 days were previously enough to price out renewals, now it’s important to gather information and touch base with underwriters at least 120 days ahead of the renewal date.
In the current environment where a hard market has merged with unknown pandemic risk, underwriters will ask more questions, even if you’ve been a customer for years.
Questions may include:
- How will you respond to higher than usual requests for emergency services in a pandemic-related scenario?
- How are you mitigating the potential effects of COVID-19 across the organization?
Underwriters will demand greater data transparency during a hard market, requiring clean, accurate and more comprehensive risk data than in previous years. Scrutiny for new policies will be significantly higher as well.
- Know your numbers. Underwriters typically receive less than 50% of the data they need to quantify an organization’s risk and exposure, which can lead to higher premium costs and reduced limits. The key to obtaining competitive pricing is knowing your business’ risk data, including loss control, past and current/outstanding claims, current accident risk mitigation strategies and outcomes, employee data, facility features and ages and more.
Traditionally, risk managers and other third-party risk assessors will aggregate data via multiple spreadsheets and documents. This is both extremely time consuming and inefficient. Employing a system-driven renewal management process with insurance renewal software can substantially reduce the time and effort required to gather and manage renewal data, and ultimately, reduce coverage costs.
Next Steps
Now is the time to explore the range of data-driven solutions available to help guide your business through whatever obstacles come your way, as safely and efficiently as possible.
For more information on reducing the effects of a hard market on your business, contact John Irving, our Power & Utility practice leader.
