BY TARITA HUTCHINSON
Put your hand up if you have recently blown your top about the cost of your insurance?
“You’re lucky, it could have been much higher, the market has been hit heavily through a number of natural disasters in the past year” my insurance broker smiled, delivering me an invoice 20% higher than the previous year.
As if this wasn’t bad enough, when I read the fine print my deductible had doubled!
I shake my head when I think about what my next insurance renewal is going to look like as I watch world events unfold from lockdown in New Zealand.
A cascade of memories flow from early January including worry that World War III was on its way as tensions rose between USA and Iran.
Hong Kong students sparred with Chinese officials as they dismantled democratic protections, and Australia burned.
By February the whole world was preparing for the onslaught of the coronavirus pandemic but many didn’t appreciate the gravity of what some dubbed a bad flu.
This became clear as by March health facilities were overwhelmed and in response governments across the globe closed for business and tens of millions lost their livelihoods overnight.
Across the world this scene has created a powder keg that has burst. Ignited by the tragic death of George Floyd, riots have broken out with loss of life, injury and property damage.
So we work from home, cars line driveways, security alarms are disabled, kids playing happily in the yard – safe from the school environment. Tropical family holidays are cancelled for 2020.
With nothing else to do I type in google searches such as: can I get a refund on my travel insurance; are people cancelling their insurance; will my car insurance go down since I can’t go anywhere; will premiums increase; if there are fewer surgeries over lockdown will health insurance go down; why are premiums increasing; will insurance companies fail; am I protected if my insurer fails; will the government bail out failed insurers; will my taxes go up if the government has to bail out failed insurers; will an insurance bail out be bigger than the bank bail out?
How did I get here? How have I gone from researching a refund on my travel insurance to an existential crisis wondering if my tax dollars are going to fund a bail out bigger than what we saw go to banks after the global financial crisis?
As I am no expert I turn to Southpac in-house investment specialist Guy Carson to see if he can make sense of trends with scientific data from the market.
I feel my spit-balling of ideas is justified after Guy starts answering my question “has the market signaled anything in relation to insurance?”
To start with, Guy explains we can expect to see an increase in claims from businesses due to disruption and on top of this there will be extra pressure for those business owners who suffered damage from rioting and looting.
Guy calls this the insurance hardening cycle.
The bad news is that this type of cycle usually has the effect of driving up premiums. Of course this is an unusual time, Guy explains, as the pandemic has put pressure on health systems in hard hit areas on the one hand, but in other locales, not so badly afflicted by the pandemic, hospital beds remain empty as elective surgeries are cancelled, and those savings are going straight to the insurers’ bottom lines.
Of course, not all things are equal, so depending on their location and the type of insurance some insurance companies are winning and others are losing. Not for profit insurers in areas of health and motor vehicles have started to refund premiums.
Guy warns that you have to look closely at what products your insurer offers and be wary if they have subsidiaries or where they are re-insuring as these factors can influence the price.
And even if your insurer is making money there is no guarantee they will hold prices at current levels if other insurers are hiking their premiums. Particularly as insurers have a penchant for investing in bonds which are currently earning interest on rates close to 0%.
Even though we are seeing a hardening in the insurance cycle it’s a bit early to determine which way things will go and how bad they will get.
Fortunately, many states have insurance protections and companies are required to keep reasonably high capital holdings. Worst case scenario, federal governments may even step in to bail out insurers if things get really bad.
So what can we do to protect ourselves from this hardening cycle?
Guy says “it is probably time to take a good look at your insurance costs and consider alternative ways to reduce your risk.”
There is a general expectation that lawsuits will be on the rise over issues like redundancies and inability to satisfy contracts. Business owners who were unable to come to satisfactory agreements with suppliers and customers over lock-down may be on the wrong side of a claim and so should look more closely at alternative risk arrangements like our asset protection trusts.
These are an important form of risk reduction and can form a solid part of a sound estate plan, protecting business owners by ring fencing assets that were earned pre-COVID19.
These assets are distinguished from business assets which can rightly be attacked and claimed.
The bottom line is that insurance is going to continue to get more expensive and it’s time to look at alternatives to provide peace of mind.
For business owners and people in contractual arrangements who usually rely on insurance for that added cushion it may be time to work out if an asset protection trust is the alternative solution to provide that peace of mind.
If you need more information on an asset protection trust we can help you.
Contact us here https://southpacgroup.com/contact-southpac-group/