Some current reports state that insurance prices are soft and commercial
insurance is readily available. Is this a sign we have avoided an insurance crisis?
“No,” says Philip Glick, senior vice president of ECBM Insurance Brokers and
Consultants. “It’s not a question of whether
the insurance marketplace will become difficult but rather when the change will take
place and how severe the increase.”
As a result of several large hurricane losses,
significant investment losses incurred by
many insurance companies and an overall increase in total claims experience, most major
insurance companies are reporting losses or
have seen their profits reduced significantly
this year, he says. To correct this situation,
insurance companies will have to increase
premiums, cut expenses or, most likely, both.
Smart Business spoke with Glick about
how an insurance crisis may affect your business and the steps to take now to protect it.
What does an insurance crisis mean for your
company?
Insurance premiums will undoubtedly
increase beginning next year and many of the
broad coverage extensions that insurance
companies have been offering at little or no
price will be pulled back. Insurance consumers are used to seeing their premiums
drop each year even if not justified by lower
claims. Such ‘freebies’ will be ending. For
some industries, such as construction or
trucking, the ability to get adequate insurance
at an affordable cost may be more difficult.
There is also a hidden cost increase likely to
come of which consumers should be aware.
As insurance company profits decline, they
may slow down the payment of claims and
become more difficult to deal with in the
adjustment of most claims.
The news is not bad for everyone. Buyers
who control losses and have good claims
experience will do far better than those who
have not paid attention to their underlying
losses in the past few years.
What actions should business owners consider?
The single most important thing is to take
steps now to evaluate the risks of your business, including property, liability and workers’ compensation exposures. Then take all
reasonable steps through safety and loss control procedures to eliminate or mitigate the
potential for losses.
It is also important to establish aggressive
claims management procedures, including
prompt investigation of any losses that happen, careful review of the appropriateness of
insurance company reserves, and aggressive
plans to defend and settle liability claims.
Careful management of workers’ compensation losses, and careful settlement and adjustment of any property claims will become
very important.
Purchasing insurance from strong, stable
insurance companies is critical. This does not
necessarily mean leaving your current insurance company — but have a backup plan
ready. One specific approach is to obtain a
standby quote from another insurance company with the agreement that the insurance
company will keep this alternative quote
open for an extended period of time, possibly
through the expiration date of your current
policies. Your company would then be covered in the event there should be a rating
drop or sale or other change of control of
your current insurance company.
How can you cut costs now to prepare for premium hikes in the future?
Increase insurance deductibles so that you
pay for routine smaller losses directly out of
pocket. When insurance markets are very
competitive, low deductibles are not as costly. As prices increase, insurance companies
will charge significantly more than the out-of-pocket costs to transfer small routine claims
to them. Paying minor claims out of pocket
will also improve a company’s overall claims
experience when viewed by an underwriter.
We also recommend that, while costs are
low, companies purchase additional limits of
necessary coverage or new policies now
rather than waiting to make these changes
later when costs may be higher. This may
include increasing limits of directors and officers liability coverage, purchasing higher limits of umbrella coverage, and upgrading limits of property or business income coverages
now to more adequately cover your risks.
Another approach to consider is working
with your current insurance company to consider doing an extension of your current policies at current premium rates and terms and
conditions. This would let you lock in current
favorable rates for another six to 12 months.
How can business owners manage this
process proactively?
Look at your company the way insurance
underwriters and loss control consultants
view it. Although most insurance buyers put
tremendous attention on bidding out their
insurance premiums, on average 65 to 70 percent of your premiums are directly related to
actual claims. Taking all reasonable steps to
reduce your claims experience is the best
way to manage insurance costs over time.
As markets tighten, medium- to large-size
companies should also consider alternative
risk financing approaches, such as large
deductibles, retrospective rating, and captive
insurance company options for workers’
compensation and liability insurance risks.
While these programs can be effective ways
to reduce insurance costs, they all represent
long-term commitments by the buyer.
PHILIP GLICK is senior vice president of ECBM Insurance Brokers and Consultants. He may be reached at (610) 668-7100 x1310 or
[email protected] or through the company’s Web site at www.ecbm.com.
