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How to Effectively Select Property & Casualty Insurance
May 2010
Richard Kohn
As we are all aware, we are living and working in an unprecedented economic environment. And while our top lines may have decreased, the significance of protecting assets at a reasonable cost remains extremely relevant. Throughout the economic downturn, the insurance marketplace has remained relatively “soft”. In essence, insurance companies have surplus capital they need to deploy which is driving down pricing. Many companies mistake decreasing premiums for a successful risk management program. In this article we are going to examine how the insurance procurement process is only one part of a successful risk management strategy.
Because of the current economic downturn, many companies are trying to reduce costs. Focusing on an all encompassing risk management program can drastically assist in cost cutting initiatives. First, you must have confidence in your broker to ensure that coverage exists for all of your exposures. This includes reviewing contracts you may have with vendors, customers, subcontractors, and lease agreements. Many times these documents reveal certain exposures in which you are agreeing to insure and indemnify other companies. A good broker can compare the verbiage in these contracts to your policy forms to assess gaps or deficiencies.
A second cost cutting mechanism can come from an intense review of your current retained losses. Determining your risk appetite will lead to applying the appropriate SIR/deductible which can reduce the overall cost of your program, including creative ways to finance collateral.
Another cost cutting measure is to inquire about your broker’s compensation. The vast majority of brokers are compensated based on the premiums paid to the insurance company. Brokers earn a commission from the insurance company that usually equals anywhere from five to fifteen percent of your total premiums. Commission levels vary by line of coverage and insurance company.
An alternative is to ask your broker to net out the commissions paid to them and ask them to charge a fee. This has multiple benefits. One, your broker is not compensated more if the insurance market hardens and premiums increase due to the marketplace. Second, if your exposures (sales/payroll/automobiles) increase, thus raising your premiums, your broker’s compensation will not deviate. By netting out commissions you also reduce the premium taxes paid. Lastly, your umbrella premium is based on the exposures (sales/payroll/automobiles) and premiums from the underlying policies (General Liability, Auto Liability & Employers Liability). By netting out broker commissions, this reduces the underlying policy premiums. Consequently, your umbrella premiums will be reduced accordingly.
Many brokers and carriers have capabilities that if taken advantage of properly, can reduce your costs and aid in securing the most competitive program. Insurance buyers should always be aware of how these capabilities can benefit your company and reduce costs. For instance, asking your broker about their in-house loss control capabilities, human resources consulting staff, claims support and technology can support your risk management efforts and mitigate risk. These additional services can also take duties off of your plate as well as improve your companies’ risk in the eyes of the underwriter. This can be a valuable tool in giving your underwriter greater confidence in your risk mitigation efforts which will make them more apt to provide the most cost effective terms. Brokers are compensated generously based on the premiums your company pays. It is extremely sensible to utilize any resources they have in order for you to outsource as many tasks as possible at as little expense as possible.
When appropriately handled, the insurance selection process can more than adequately protect your assets as well as lead to several opportunities for cost reductions. As with most business experience, gaining the knowledge of relevant program design options and utilizing vendor capabilities will improve your overall risk management program.