This article originally appeared in the January 2024 issue of Security Business magazine. Don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter if you share it.
Wayne Dean, a partner with Snellings Walters Insurance Agency, has been counseling security integrator executives on insurance options for the better part of two decades. As 2023 closes on a “phenomenal year” for his firm, he reports a much more stable market than it has been in the past.
Except for a few product lines, such as auto and umbrella policies, the market is stable and positive for integrators. The vast majority of commercial integrators have now incorporated a cyber policy. And despite rampant mergers and acquisitions, Dean has managed to pick up quite a few new integrator clients.
Security Business caught up with Mr. Dean to discuss the overall landscape of the insurance market for security integrators in this exclusive Q&A:
Do you think integrators are becoming more open to the different options of insurance?
Of course. The subject that we talked about the most over the last couple of years was cyber insurance. We built our foundation, our differentiating value-add by learning cyber early and trying to get it out there to educate our customers prospects in the future. And it seems like that's caught on, not just through our firm, just in general. Bill Bozeman and I looked at a stat back in 2018 that said 22% of integrators had bought cyber insurance. If we ran those same numbers today, my guess would be 90% have bought it.
What are the overall trends in the market as far as costs and coverage options for integrators?
The overall cost is starting to flatten. If we get into specific coverages, there might be a line item or product line that might be a little bit more, but it has stabilized across the board. From a pure underwriting perspective, we've seen rates stay stable for the last 12 months.
Let's take auto insurance as an example. For a long period of time, loss ratios were very high, and premiums were going down – so in 2014 to 2018, most buyers received a flatter, better auto premium, even when there were losses attached to that account. That flipped in 2019 and through COVID years, and even though people weren't on the road as much, the auto premiums spiked at levels we had never seen before. That was the insurance company balancing the sheet – losses were high, premiums were going down, and the gap was too wide for insurance carriers to make money on auto; therefore, they raised the bar on their premium standards, which leveled out some of the loss ratios.
This is good for integrators, I assume.
Absolutely. There were days in a soft market where premiums decreased 10 to 25%, but from 2020 on the market had hardened, which meant spikes in certain lines of business. Right now, we are seeing more stabilized, nearly flat premiums at renewal. For our clients who have increased their revenue, they are seeing 1-5% increases with 15% of increased revenue.
I might meet someone who says, "Hey, I read this article and my insurance went up 30%." There will be exceptions, but overall, if you take out commercial umbrella and commercial auto, we are seeing a very stable market.
How has automobile insurance changed for integrators?
Auto is the big driver of the industry, and in the security market, the bigger the fleet, the bigger the increase they have seen on auto premiums. Loss ratios are running at about 106% right now at a national level, and at a little over 80% industry for the security vertical.
Because of this, driver safety programs have become more important and focused. Finding employees has been a challenge for the security industry, and finding quality employees who have good driving records is very difficult. Finding employees is hard, and then when you do find them, insurance carrier requirements have been very strict. We've had to really find a balance between the two.
I often get calls from clients who say they have a new 21-year-old technician that they need to add to an auto policy. They know 21 is in the lower age range of what carriers want to see, but because he is a good new employee, we've had to go to the insurance carriers and ask them to trust us. Which they do. The insurance carrier will make an exception and put the employee on probation status. They check every six months for any issues – there can’t be any claims or violations. If there are, then the company will have to pull them off the road.
What else should integrators do to help with that auto insurance premium?
Put in GPS tracking systems in units to help offset some of the premium and allow insurance companies to get more comfortable with the risk. Talk to employees on a regular basis about the importance of safety and loss ratios and perhaps create incentive programs for safe drivers. Things like that can also help get people motivated to be careful behind the road.
What about cyber insurance specifically?
In 2017-2019, saw cyber was a big topic. Premiums were going up, and everybody was scared of what the market was going to do. The good news is that today, since there are so many more companies buying insurance, it is lowering the loss ratio, which, in turn, is getting more insurance companies into the ballgame. With more insurance companies and more entities buying cyber insurance, you will see premium levels comes down.
The negative is the scrutiny behind the underwriting guidelines, which means companies must have certain internal cyber protections in place. There are many areas of required services and security measures that must be in place before anybody writes a cyber policy.
Five years ago, you could buy cyber insurance and you didn't have a lot of underwriting requirements involved. They were basically offering cyber quotations and policies to non-secure accounts. Once COVID happened, it really isolated the cyber market due to working from home – you had people looking at emails and filtering attachments through their cell phones and it just became the norm. That created a bit of an increased spike in cyber claims during 2020 and 2021, but that trend is coming back down.
In 2020 we saw more ransomware and more social engineering claims; in 2022 and 2023, we've seen that trend come down because those underwriting guidelines have been more scrutinized and are stricter on companies, which, in turn, better protects their systems.
Are more end-customers asking for cyber protection from their vendors?
I explain to integrator executives all the time – don't wait until you get a contract that requires it to acquire cyber insurance. Do it now so you build premium momentum, you are already budgeting for it, and margins won’t be squeezed on a particular contract because now they had to buy it. I have seen scenarios where a company that didn't have a cyber policy needed one for a new job, and it ate into 18% of their revenue on that job. After that point, the money has been spent, and every job that comes after it is covered. It also gives them a broader range to attract better jobs. So, cyber insurance could be the most important piece from a coverage perspective, even if it is one of the smallest pieces of their insurance program from a cost perspective.
Are there changes to other types of insurance typical to integrators?
One area that we've seen from an insurance requirement perspective is higher commercial umbrella coverage. For a long time, integrators were seeing anywhere from $1-3 million as their commercial umbrella limit; now the requirements are north of $5 million and some north of $10 million. Carriers are maxing out capacity at lower limits than they have in the past – they used to be able to give us a $10, $15 or $20 million umbrella with no issues; now they can offer a $5 or a $10 million umbrella and that's it, no higher. Then the broker must find a monoline or a standalone limit for a commercial umbrella to sit over that umbrella.
Why would you need umbrella insurance?
To protect the assets on top of what you already have. Let's say you have 15 trucks and a million-dollar insurance policy. Say there is one claim where the driver hit multiple cars – you are talking north of a million. So an umbrella policy is additional liability protection for the owner.
Any other big insurance trends that integrators need to know about?
D&O, which is director and officer liability, had a major spike in 2020 and 2021. D&O is insurance that protects the officers and the owners of the company from direct lawsuits.
Has the active mergers and acquisitions market fueled this spike in D&O?
We are in this world now where private equity money is just being spent like crazy, and we're seeing a lot of companies being sold to private equity – more activity than I have seen in probably the last 10 years. D&O becomes a major protection for these private equity owners.
How has M&A affected your firm? If PE comes in and buys a company, how does that impact insurance needs?
Commercial liability, general liability, commercial auto, workers' comp – none of those needs really change. That being said, we had a recent client sell to private equity that has its own relationships with insurance carriers, and they moved their insurance over to that other party. So no question, it is a threat to our business – we have more accounts that we lose from private equity than we gain. But it is not big numbers – maybe two or three accounts a year are lost to private equity and one is gained.
What we have also seen is a big increase in limits when private equity comes in, because there are more assets to be protected than there were before. We see the biggest movement when it comes to limits, and obviously, cost increases as the limits do.
Paul Rothman is Editor-in-Chief of Security Business magazine. Email him your comments and questions at [email protected]. Access the current issue, full archives and apply for a free subscription at www.securitybusinessmag.com.
