Some time ago I predicted that in 2012, the dealership insurance market would become “schizophrenic.” I could not have been more correct. Dealers who renewed their coverage in late 2011 or early 2012 will be in for an unpleasant surprise full of higher premiums, larger deductibles and possibly more restricted coverage when the next renewal comes along. Of course, the proactive dealer willing to seek bids from as many carriers as possible stands the best chance of minimizing the pain.
Premiums on the rise: As predicted, insurers are working hard to push premiums up. This is a significant change from the buyer’s market we have seen for much of the past 10 years. In addition to increased premiums we have seen bigger deductibles become more commonplace. Higher deductibles are a de facto premium increase. The dealer’s real insurance cost is a combination of both premiums and deductible costs. Dealers with higher than average loss experience are getting hit the worst.
Dealers in California and Illinois seem to be getting the brunt of a tightening workers’ compensation market. In these states, premiums increase in the 25% to 50% range are not uncommon. Another development we are seeing nationwide is a very wide disparity in garage program premiums, much larger than before. Until recently, often bid premiums were within a 10% to 20% range. As an example, for a single point store, we might see bids ranging from $90,000 to $110,000 for similar coverage. Today the quotes may well range from $90,000 to $140,000. This emphasizes the need for dealers to get as many insurance quotes as possible to avoid being stuck with a renewal quote at the high end of the range. For dealers with good loss history, losses less than 25% of premium, premium increases of 7% to 12% seem to be the norm in much of the country. Some carriers that have entered the dealership marketplace over the last five years are now seeking the most aggressive rate increases.
To make matters more challenging, insurers are requiring more detailed information related to past claims, loss control, buildings and employment practices. This is often used as a tactic to weed out who they will or will not bid on. If the information is not provided, no quote will be offered. These details may also be used to determine if the dealership qualifies for the best rating plan, as insurers tighten their underwriting requirements.
So, with all this turmoil in the market, getting alternative bids and quotes is a must. If your insurer does not think you have other alternatives, they will push premiums and deductibles as far as they think they can. Having alternatives is your best defense.
The return of captives: As the insurance market tightens we will see an increase in the number of captive insurance programs being offered. The term “captive” can mean many things and they come in many forms. For our discussion here, “captive” means some type of insurance program whereby the dealer shares in the losses or profits of their insurance program by way of a formal reinsurance arrangement owned by the dealer, dealership, dealer’s family etc.
Captives should be looked at long and hard. While there is nothing inherently wrong with captive insurers, they have had a spotty history for the average dealer or dealership group. Captives are at their best in markets where the right coverage is hard to come by and competition is sparse. Neither is the case with auto dealerships. Because dealership captives have a hard time competing with a buyer’s market, recent offerings have been limited. As the market tightens, agents looking for a new angle will begin offering captive programs.
One of the biggest problems we see with auto dealership captive insurance programs is that instead of a tight, well-designed program, we see many parts cobbled together into an incomplete whole. Not all dealership coverages should be part of a captive insurance arrangement. Covergaes like garage liability and workers’ compensation where the claims may take years to pay out work best. Coverages with low premiums and catastrophic potential like property coverage, auto inventory, employment related practices and umbrella coverage should not be insured in a captive. Even if the captive costs are lower for garage liability and workers compensation, any savings may be offset by higher premiums for stand-alone property, auto inventory, employment related practices and umbrella coverage.
Under the current tax laws, captives must share some risk with unaffiliated parties to be deemed an insurance company. As such, any captive arrangement must take on at least some risk from other insureds, usually also a part of the same captive program. Only dealers with effective and well designed risk control programs should consider themselves candidates.
Captives are not immune to the pricing swings of the insurance marketplace. As the insurance market tightens, captive fronting fees, management fees and reinsurance costs go up as well. When the market swings back to buyer’s market, captive fees and reinsurance costs respond much slower than the retail market leaving the dealer paying more than the market requires. The bottom line is that property and casualty captive arrangements should be considered very carefully as they may not be as good as they seem at first blush.
NADA 2013 – Orlando – Austin Consulting Group is proud to announce that Roger Beery will be presenting three workshops, “How to Benefit from Being an Intelligent Insurance Buyer.” At the request of NADA, Roger is joining Jeff Mount of Federated Insurance Company and Steve Gibson of Dealer Risk Services to offer a comprehensive presentation covering the dealership insurance landscape, best practices for dealership risk management, coverage issues dealers need to know along with effective insurance buying and bidding.
This unique and insightful workshop offering perspectives from a direct writer insurer, agent/broker and an objective consultant will be offered Friday February 8th, Saturday February 9th and Monday February 11th. Please join us.