In the UK, in 1997, we saw a change of government. The Labour party, or New Labour as it was known, swept to power with a huge majority. With this mandate from the country they set about making many changes which led to consistent year on year growth. We know now that this year on year growth could not be sustained. Gordon Brown (remember him?) when he was Chancellor stated on many, many occasions that Britain would not return to boom and bust economics. He seemed to blame boom and bust on everyone else and that his government would be immune to it.
As we sit here in early 2011, we can look around the country and see that, instead of us no longer having boom and bust, we have had the most spectacular boom and to top it all an even bigger bust. That is not to say that it is Labour’s fault. Any government would have made similar mistakes to a lesser or greater degree. It has happened all around the world, the boom was fuelled by debt, not real money, and this had to come to an end. The mistake that Brown made was to think that he could stop the cycle.
Unfortunately, it is simply not possible. Whilst there have been thousands of books written on economics and billions and trillions of words spoken, you cannot get away from the basics of supply and demand. If you start to increase the supply, the prices will start to dip. Look at the price of oil, this is tightly controlled by OPEC, they know that eventually the supply will run out, so why not make hay while the sun shines. The rest of the world has to suffer because they control the supply and as a result the demand. If you restrict supply to a commodity that people need, then the price will go up.
In business insurance, we are in exactly the same boat. Our industry is described as cyclical, and this have nothing whatsoever to do with weather. In the developed world there is a huge demand for insurance, or risk transfer. People want to put their risks onto someone else’s shoulders and will pay a premium for this.
As the returns on this start to increase, then more businesses decide to get involved. If you can get involved in insurance and get double digit returns on capital, then more people will get involved. As the world economies boomed, there were more businesses and more consumers and more need to insure these things. In the UK, we saw a huge spike in prices after the tragic event of 9/11, but after 2002/2003 we have seen prices steadily falling back and back. Someone paying a 1,000 a year for their takeaway insurance, for example, could if they chose to, shop around year on year and either get the same, or a lower price.
But, as we said, we are in a cyclical industry and the boom has now come to an end and we are getting to the bottom of the cycle, our bust. What this means is that the returns are not as good, there have been increased losses, whether from theft, fire, liability or weather and the commercial insurers are now starting to realise that 6 or 7 years of price stagnation or reduction is not making them money.
So, we are starting to see prices gradually increasing. Business customers will complain, but it is worth remember that in real terms over the past then years, they have not down that bad at all. But, this will fall on deaf ears, quite rightly, when a renewal comes through at 15% more than last year. The problem is that we cannot manage the cycle well enough. We have to wait till we get to the very, very bottom and then it is panic pricing for a few years.
But, if you are faced with a huge increase, do not worry. If you have had a good claims experience, you can still look around and save money, without any reduction in cover.
Jack Brown is a professional writer who writes on various finance and insurance related topics. For more information on small business insurance he suggests you to visit http://www.businessinsure.co.uk