With the 2009-2010 insurance renewal term finally completed, I thought I would talk about the things affecting insurance premiums: losses, economic environment, legislation and the size of an organization.

The first item to consider is loss history.  An organization with a high loss ratio (Ratio = Losses/Premium) is more likely to see a premium increase than one with a low loss ratio.  Generally, your premium will not increase if you incur one loss because you are purchasing insurance for that one catastrophic loss.  This is one reason having a sound risk management program is essential to any organization, not just non-profits.  A successful risk management program will result in a reduction of your overall insurance premiums.  However, insurance premiums are based on a number of other criteria, not just on one’s loss history.

This brings me to my second point, which is economic environment.  You may have heard of “soft” and “hard” markets.  Insurance companies make most of their money from their investments and public investments into their companies, so a soft market is dependent on the buoyancy of the stock market.  During a soft market, insurers are eager to write new business and so they compete to write new accounts, they offer relatively low premiums and they are inspired to identify new coverages and products to meet the needs of our sector.  By contrast, when the economic cycle is on a downturn, generally we move into a harder market.  A hard market brings higher premiums, more restrictive coverages and lower limits.  To generate revenue lost on their investments, insurers increase premiums to make up for the shortfall.  Some coverages may cease to be available or they are severely restricted, limits are reduced and exclusions are imposed.  It is not uncommon for some types of businesses to be unable to find reasonable insurance arrangements.

Legislation is another factor in considering insurance premiums.  Insurance is highly regulated in Canada, with each province and territory having its own insurance legislation.  Insurers are restricted to certain types of investments only and must adhere to strict government regulations when operating their businesses.  For example, insurers in Ontario are not allowed to invest in stock that is deemed to be too risky.  They must maintain cash reserves equal to the amount of business they write at any given time so that they are able to pay for any and all claims to which they may be exposed.  Legislation in Ontario is constantly changing as claims that are brought before the courts are decided and become precedents.  Auto insurers are legislated to provide a minimum amount of liability insurance for all vehicle owners in Ontario in addition to minimum accident benefits.  As precedents are set and reforms to existing legislation are made, insurance rates are affected both positively and negatively.

My final point is about the size of one’s organization.  Insurers consider the physical size of the organization’s structure, the number of employees, the scope of the organization’s business and the number of locations and the environment surrounding these locations. The larger the organization, the larger the spread of risk which helps reduce the rate of insurance and in turn reduces the insurance premium.  That is why group programs are effective when obtaining terms from insurance companies.  The volatility of the marketplace is one of several reasons why purchasing insurance as a group affords a certain level of protection during uncertain times.  A group such as SHSC allows us to consider alternatives to the normal insurance marketplace to meet the needs of our sector.

This is basic summary of a much more complex process. Hopefully, it will give you a basic understanding of how the insurance industry works.  Remember you can access valuable insurance and risk management information in our newsletter, Risky Business.  Check it out under Useful Forms & Newsletters in the Insurance section of our website.