When it comes to food, most people have a rather hearty appetite. A four-course dinner at a trendy new restaurant or a burger and a beer at a beloved corner bar? Bring it on! But when it comes to business-essential topics like insurance and the associated commercial risks that make it an important part of every organization’s bottom line—a business owner’s appetite may not be so easily whetted.
While the task of reviewing insurance needs can often be seen as necessary but unpleasant, it doesn’t have to be that way. Rather than taking on a sales persona, your insurance broker should assume the role of an advisor with the primary goal of guiding your insurance choices to arrive at the best possible fit at the best possible rate.
Understandably, without proper guidance, many people immediately scroll to the last page of an insurance proposal to see the premium. It’s natural to be focused on the cost. But the devil is, indeed, in the details. Insurance premiums are derived from exposures multiplied by a given rate.
When considering insurance options, the most important decision you make is how much you can afford to fund yourself. In effect, what’s your appetite for risk?
Part of this concept is self-explanatory. You choose a deductible that’s reasonable and that you can absorb at the time of loss. However, a larger business can drive costs down with a loss-sensitive approach. Policies can be designed with large deductibles or self-insured retentions that result in ultimate savings.
One of the best examples lies in workers’ compensation insurance. Many businesses have been insured with “first dollar” coverage since their inception. Often their premiums started at just a few thousand dollars per year but now have grown to over $250,000 for this coverage line alone. As a business grows, the ability to absorb larger losses usually grows with it. With proper guidance, the opportunity to reduce the net rate should also increase. By managing claims internally and accepting a large deductible, for example, premium credits of up to 75 percent can be applied, depending on risk parameters and loss history.
For companies with a strong safety culture and years of experience including hard loss data, coverage adjustments can accommodate that changing appetite for risk to drive bottom-line savings.
Expanding companies with a larger appetite for risk can also realize cost savings by reexamining their commercial property insurance. Many underwriters can apply a (per location) loss limit. For businesses with significant geographic spread across multiple locations, this could be an option worth exploring.
Consider a company with five locations and a Total Insured Value (TIV) per location of $20 million. The combined total insured value for all locations would be $100 million, and the company would normally carry blanket coverage of $100 million to fully cover their total risk. This blanket limit would be rated based on the presumption that simultaneous total loss is unlikely. However, the company would indeed pay an insurance premium based on the entirely of this value. Assuming the insured is confident that simultaneous loss is unlikely as well, why not cap the per-occurrence property loss limit at $20 million? It’s a method that is commonly used with multi-state or multi-region companies to reduce the total cost of risk.
The commonality and application of these examples has a direct correlation to how much risk a company is willing to take to reduce overall costs. The larger a company grows, the more latitude it has to consider such risk management techniques.
Ideally, each line of insurance coverage—including health benefits—can be approached in this same way. Sometimes for no reason other than lack of a recent policy review, a buyer’s risk appetite can appear to vary greatly from one coverage area to the next. For instance, why else would a business self-insure the first $100,000 of a workers’ compensation loss but keep their auto physical damage deductible at $1,000 if they average fewer than three accidents per year? These inconsistencies develop over time, but if reviewed annually to match a business’s overall appetite for risk, savings can be achieved.
In risk management circles—which aren’t as exciting as they sound—you hear the expression, “They’re outgrowing their agent or broker.” This is often true for large, risk-laden clients. The agency that is selling cookie-cutter products is an agency that normally cannot design or have access to insurance programs that include loss-sensitive options. If your business is growing and you haven’t heard about these methods, it might be time to consider other options.
Further, if your company is paying over $500,000 for casualty lines (Commercial Auto, General Liability, and Excess Liability), you should consider Captive insurance options. Simply put, captives are programs designed and paid for by members. Businesses that pursue a captive option are very interested in controlling and managing risk. They often have a higher appetite for risk based on their culture and experience. Because of this, they can pay a lesser net rate and enjoy returns that reflect losses not incurred.
With insurance as a shield meant to protect a business’s balance sheet, you need to make sure your coverage is consistently designed across all lines or types. Measuring your appetite for risk is a good place to start a conversation with your Oswald insurance advisor, whether growing your business or launching one.
This article originally appeared in the August Q3 issue of Commercial Baking.
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