It’s been a while since I have reported on the state of the auto dealership insurance market. I am hesitant to do so now because of the uncertainty we see all around us. This piece is being written two months before you will read it. As for the December 1st renewals, we continue to see a vigorous marketplace. All the usual suspects are writing business, some more aggressively than others. There are more insurers providing quotes than we have seen in years. Insurers new to the dealership market usually understand that to get a dealer to change carriers, they need to offer something more; either better pricing or better coverage. For the most part, we are seeing more aggressive pricing rather than broader coverage. The new car dealership insurance market is not what we at Austin Consulting would call soft, but it is certainly vigorous.

The question that is on our minds is what effect will the continued financial crisis have on insurance premiums? Traditionally, there is an inverse relationship between insurance company investment income and the premiums you pay. When investment income is high as it was in the late 1990’s, insurers drop their prices to get more market share which increases their investable cash. As we saw beginning with the market slide in 2000 which was made worse by the events of 9/11, premiums often go up in times of low investment returns. To call this a time of low investment returns is a gross understatement.

We hear on every business news channel the traditional models for analysis of markets and businesses just aren’t working and as of this writing that seems to be the case with dealership insurance. The stock market, while nose diving since October, has been headed south for over a year now and the insurance market is going strong, though this rosy scenario might not last much longer. Insurers are not keeping their rates in check just to be nice. They are chomping at the bit to raise prices. So far the competition in the market has kept them in check. In addition, the struggling economy and the possibilities of additional bail-out programs like we saw with AIG are probably helping to keep premiums stable.

Reinsurance is the insurance that insurance companies buy to spread their risk with many other insurers worldwide. One of the effects of 9/11 was to push reinsurance prices very high for a couple of years. This additional cost added to the increased premiums we saw in 2002 – 2004. Many reinsurance contracts renew at the end of the calendar year. It remains to be seen if the costs of reinsurance contracts are going up due to the current investment environment. Certainly most insurers will try to push through any reinsurance cost increases, meaning higher premiums for you next year.

So what does the next year hold for insurance premiums? If the traditional models hold true, unless we see a “V” bottom to the current stock market decline resulting in a rebound few are predicting, insurers will try to push premiums up and you’ll be paying more during an extraordinarily tough time for dealers. Soon dealers may find themselves in a difficult position because they are not expecting a premium increase and then, boom there it is. The agent says they weren’t expecting it either, and they are just as surprised as you. Unless the dealer has other bidders already quoting, they may be forced to renew at the much higher price or face a short-rate penalty (in most states) if he tries to change to a more competitive program mid-term.
So far competition has been enough to keep insurance rates stable and in some cases still improving. It will be competition that either forestalls rate increases or if the traditional models do hold true, keeps premium increases to a minimum. If you wait until your agent shows you an increased renewal premium, it’s too late.

The only way to create competition is to run an effective bid process and create your own competitive environment. It is best to start 90 to 120 days before your renewal and bring in as many bidders as possible. Be certain they are all bidding on the same variables. Often the renewing insurer will want to use “averages” on the variable items that make up insurance pricing, like auto inventory and employee numbers, instead of the information you provide. Not only does that confuse matters but it also may make your renewal higher than it should be, if your dealership has undergone any kind of downsizing during the last policy period. All bidders should use underwriting information that reflects your best estimates for the next year for vehicle inventory, payroll, employee count and any other variables.

The next year is probably going to be rough, but you don’t need me to tell you that. The possibility of rising insurance costs just adds a bit more pain. Whether insurance premiums start to rise or not, the only way to be certain you are keeping your insurance premiums low is to create a competitive bidding environment. The dealership risk management professionals at Austin Consulting Group stand ready to guide you through this complex process.
Here’s hoping the traditional models are wrong and we continue to have a vigorous insurance market and competitive premiums.