Increasing Retentions: The Hidden Premium Increase
By: Chad Glenn (Insurance Journal) November 2013
Is the market hardening? A Google search shows that most experts think it is, and it is nearly impossible to find a professional journal without an article discussing the topic. The premium increases that are being implemented indicate that a hard market is at least on the way. Whether your program has begun to feel the effects of this yet or not, it is very likely that at some point in the near future it will.
In addition to premium increases and the expert opinions, one telling suggestion that the hard market could be upon us is the number of large deductible programs required to increase their retentions.
Increasing Retentions: The Hidden Premium Increase
By Chad Glenn | November 4, 2013
calculator
Email This
Print
Newsletters
inShare
Article
Comments
Is the market hardening? A Google search shows that most experts think it is, and it is nearly impossible to find a professional journal without an article discussing the topic. The premium increases that are being implemented indicate that a hard market is at least on the way. Whether your program has begun to feel the effects of this yet or not, it is very likely that at some point in the near future it will.
In addition to premium increases and the expert opinions, one telling suggestion that the hard market could be upon us is the number of large deductible programs required to increase their retentions.
A word from our sponsor:
Sponsored by: The Institues. Click here for more info.The Institutes are the leading provider of professional development solutions for risk management and property-casualty insurance professionals. Advance your career’s potential and improve your confidence by earning a respected, industry-recognized designation. Through our proven knowledge, you can achieve powerful results.
Learn more now.
According to the RIMS Benchmark Survey — produced annually by the Risk and Insurance Management Society (RIMS) — there is a slight indication from 2010 to 2011 that some companies participating in certain lines of business increased their deductible/retention amounts (results may be skewed as tables provided do not compare similar respondents across years). As the market continues to harden, it is likely that the shift will be more evident from 2011 to 2012.
Several programs have been forced into these higher layers but are not being credited adequately in the form of a premium reduction for accepting the increased risks. For this reason it is essential that the directors of these programs understand how to quantify this additional layer of risk before essentially paying twice for coverage that was previously provided, once for the lack of premium discount for the additional layer and again for the losses that were previously covered and now retained.
In addition to those being pushed, several of the smaller, mid-market companies are accepting these higher limits to eliminate any premium increases. They accept the additional layers without fully understanding the risks and costs associated with the higher retentions that their programs will have to pay for in the future. While a reduced premium may seem like an appropriate measure to reduce costs, it is essential that purchasers understand the costs associated with this additional layer to determine whether the reduction in premium now outweighs the additional expected future costs.
Evaluating the Premium Reduction
This article discusses several methods for calculating the costs associated with the additional layers of retention depending on the size of one’s program. While some of these methods have shortcomings, and may require additional expertise and a more complex approach to achieve better accuracy, it is quite possible for risk managers and program directors to get a sense of the appropriateness of the new premium.
For illustration purposes, we utilize an example of a program covering workers’ compensation. All numbers, development factors, and increased limit factors are for illustration only. However, factors that would be applicable to your program can be found through many sources including brokers and actuaries or can be purchased from the National Council on Compensation Insurance (NCCI).
For a program that is large enough or has had a few claims each year that have penetrated or exceeded the proposed layer, a quick check is as simple as Method 1, figuring the average amount of losses incurred in that layer. For example, if XYZ Insurance Co. wants to increase retention from $100,000 to $250,000 and the insured has incurred losses in this layer as shown in Figure 1, then the premium decrease for accepting that additional $150,000 of risk should be at least $175,000. This quick and dirty estimate assumes the program has not changed in the last six years (i.e., business is the same, safety programs are similar, etc.). Method 1 also completely ignores loss trends and loss development, so in most cases it would understate the amount of premium reduction.
