The traditional insurance market is set up to benefit the insurance companies first, without much thought to the benefit of the businesses they insure. This leads to the global commercial property and casualty insurance market disproportionately impacting well-performing insureds in several ways:
Rising Premiums: Well-performing businesses, which typically have fewer claims, still face rising premiums due to overall market conditions. Factors such as increased natural disasters and inflation drive up costs for all, regardless of individual performance, leading to higher premiums even for those with low-risk profiles.
Adverse Selection: The market's inability to accurately differentiate between high-risk and low-risk clients can lead to adverse selection, where well-performing businesses are priced similarly to higher-risk ones. This mispricing can result in well-managed companies subsidizing the risks of less efficient firms.
Limited Coverage Options: As insurers adjust to increased risks and costs, they often reduce coverage availability or exit certain markets entirely. This can leave well-performing businesses with fewer options and potentially inadequate coverage, despite their strong risk management practices.
Reinsurance Costs: The cost of reinsurance for commercial insurers has risen significantly, with an increase of 30.1% in 2023. Driven by frequent and severe losses, this cost is passed down to policyholders, including well-performing businesses, in the form of higher premiums and stricter policy terms.
Inefficient Market Dynamics: The overall inefficiency in the market, such as the inability to accurately assess and price risk, leads to a "death spiral" where good risks are priced out. This results in well-performing businesses being forced to pay higher premiums or accept less favorable terms, despite their lower risk.
These dynamics illustrate how well-performing insureds are naturally disadvantaged in the current commercial insurance market and are some of the key reasons well-performing business turn to captive insurance companies to fully benefit from their lower risk profiles and overcome systemic inefficiencies.
Tired of subsidizing under-performing businesses and burning money in the corner of the room? From initial captive insurance education, to captive insurance company formation, and ongoing strategic advice for your active captive insurance company, Captives.Insure can help guide you through the entire captive insurance process.
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