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In the last 4 years 5 insurance carriers have pulled out of insuring the inflatable rental market!
Why? The answer is easy; the losses exceeded the premium received. So what has caused this situation in this industry? The answer is not that easy. And some of you will not like reading this article. No candy coating, no soft touch, no sweet talk. Just the facts…….
First let’s look at some background of what we have seen in the last 16 years.
So a person decides to get into the inflatable rental business, usually after renting one for their child’s birthday party and think “I can do this and make a ton of money.” There is no requirement for licensing (for most states), training, business experience or marketing background. They just need the funds to purchase a few inflatable units, usually 3-4 to start at a cost basis of $5000-10,000 depending on what is purchased. They usually have younger children and have an immediate source of referrals from neighbors and the children in school. They get swamped and order 4-5 more as the demand is high. First year premiums start from $750-1500.
Why are premiums so low for this type of business? NEVER in recent economic history have interest rates been so low for so many years. Investment income was low so insurance companies looked for different markets to enter to increase premium and profit for their stockholders. So you saw normally conservative companies get into entertainment risks. An insurance company would put together a program for amusement devices and go thru a normal distribution system.
The normal distribution is the insurance company thru a Managing General Agency (MGA) thru a Retail Insurance Agency and then the customer. The insurance company or Managing General Agency does not have the time or personnel to answer questions from prospects so the prospect would call their local agent. Most of the time the local agent does not fully understand this risk so they Goggle and find an MGA that writes this risk, get an application, send to the prospect, get it back and send to the MGA. The MGA puts in the underwriting info (gross sales) inventory maybe, state maybe, and uses the rates from the insurance company and sends back to the agent. The agent sends the quote to the customer and to bind they need to sign an application and pay the money. Easy peazy until there is a failure of disclosure of gross sales or inventory or lack of experience. What, you might ask; didn’t the customer tell the truth???
So now let’s do the hypothetical math, let’s say that there are 5000 inflatable rental companies in the USA. Let’s also say that they each have only 4 units and will estimate $25,000 gross sales the first year, very attainable. Due to several companies coming into the market 8-10 years ago the rates plummeted as each company tried to grab market share. So instead of charging a fair rate of 10% of gross sales $2500 for annual insurance they only charged $750.
So the industry only took in $3,750,000 instead of $12,500,000, this is a huge difference in the checkbook balance. But wait, there were several insurance companies that jumped in so that premium is divided by say 3 insurance companies evenly, that only gives each company $1,250,000 to pay expenses and claims. Let’s say that the average claim is $10,000, that amount only allows for 125 claims to be paid in that year. If there are 2.5 claims of $500,000 they are out of money. That is not discounting for costs of the policy etc.
So the internet has allowed communication, good and bad to happen in milliseconds. Now business owners’ talk and some figured out that since these policies are not auditable (due to competition) that they never have to disclose their correct gross sales, another shortage of premium. An example would be if the second year the customer doubled their gross sales to $50,000 their premium would double also if the rates were consistent, so premium collected should be $7,500,000, but instead the insurance company allowed the customer to report low once again without asking for documentation so they were short $3,750,000 for the second year. And then the claims came in again, and again, and again and then the insurance companies pulled out again. So maybe it is the insurance companies and agents faults for not requiring true underwriting information?
So is it good business to go to your auto insurance agent to secure your business insurance if they have no experience writing this type of business? Would you go to a foot doctor for a heart problem because he is your friend? This is a common mistake that we see in many business types due to ease of talking to someone local. Now with the internet you can communicate with someone on the other side of the country via internet, email and phone calls. But you should make sure that that agent is experienced in your business type first. You can ask for referrals, you can check them out on Goggle or Facebook and even Linked In.
So what is in the cards for the amusement industry and insurance? What will need to happen is that the industry needs to have better documented training, maybe more employees per customer mix, maybe correct reporting of gross sales, maybe repairing the used equipment when it is noticed that there is something wrong. We probably need business owners to understand that you cannot allow your customers to do what they want, instead do what is right for them in as far as safety and you for your continued business. It’s ok to tell your customer no your child cannot go on that ride. Or tell someone that if they cannot follow your rules that you will ask them to leave and have to do so. Yes the whole world would know that you were a horrible business owner by kicking them out, but what about the customers that think thank you for doing so, but never verbally tell you so? Are you better off without that person that might be a claim, or keep their money an allow them to do whatever they want to do? Remember one claim, if it averages $10,000, will change your renewal to a minimum from your $1,500 to around $20,000. So what is your choice for your business in the next 12 months?