Risk Management Tips from the Pros
You may have been advised that buying your insurance from the same insurance company allows you to develop clout, receive consideration, or eliminate gaps in coverage. On the contrary, it stifles creative marketing, eliminates competition, and very often forces the buyer to purchase coverage from the wrong insurance company. How so, do you ask?
Some insurance companies target their marketing efforts to sell a specific insurance coverage to all industries, not a specific industry. For instance, why would one insurance company prefer to write Workers Compensation, General Liability, or Directors & Officers alone without the support of other coverages? The reasons are many, predominantly however, in building a better mousetrap these companies have either developed a better contract, had more favorable experience with this coverage (as in profit) or developed support services in loss control and claims handling that go beyond the capabilities of their competitors. And, the Insured, by going to one such carrier, can reap the benefit.
ICA ’s non-conforming recommendation offers another advantage to the buyer. Divide and Conquer. It is simpler to replace cancerous insurance coverage (policies ridden with claims) written on a stand-alone basis when not combined with the other insurance coverages. The buyer may approach his other existing insurance companies or look for a suitable replacement insurance company that also writes this specific coverage. In any case, when your policies are with different insurance companies you will obtain a more accurate picture from the insurance company as to how your losses have affected your premium.
In the alternative, consider purchasing as many policies as possible from one insurer where those insurance companies can offer increased premium credits by combining coverages into a policy that is specifically designed to offer these similar coverages. Higher premium volume may result in increased negotiating leverage. However, weigh this against the earlier tip of buying insurance from carriers who have specialized in specific coverages.
December 31st, January 1st, and July 1st are traditional times when most insureds purchase their insurance. Unfortunately, the timing could not be worse. From November 1st to December 31st, the insurance marketplace begins to slow down because of the shortage of underwriting capacity. Most insurance companies have written most, if not all, of their premiums for the year. On these dates, the insurance underwriter is also overloaded with work. New business is his last concern, and, unfortunately, because so many insureds renew their policies, it is likely each account renewed will not be given adequate consideration. ICA recommends that you date your insurance policies from March 1st to November 1st in order to maximize your return, and avoid these troublesome dates.
You may know that many insurance companies have minimum premiums for writing coverage. Less well known is the fact that some brokerage houses also have minimums, such as minimum commissions. A soliciting broker will probably not be very happy when he learns that your insurance program is about to be spread among association programs, direct writers and other brokers. Some conversation – and compromises – might be in order to maintain the expected level of service.
Talk to your broker about your requirements once the policy has been ordered. Will the broker be providing claims services, safety or engineering services, or other services related to the policy? If the work the broker is expected to perform goes beyond ordinary insurance policy delivery and follow-up, consider paying for the extra time. On the other hand, if the work is routine and expected from your standpoint, then the commission or fee earned by the broker should be sufficient. Remember, the waiter who delivered your $250 bottle of wine used the same number of steps as the waiter carrying the $25 bottle to the next table.
It is essential that the agent or broker clarify what services it will provide and what commission is being earned so that you know that you are receiving the proper level of service for fair remuneration. You might want to request a written Brokerage Service Agreement from your agent or broker, spelling out the services to be provided by the broker on your behalf, and should include the broker’s obligation to identify the risks that face your company and assist in designing the risk management and insurance program. It can also detail the claims service, loss control and insurance market assessment. The use of a service agreement benefits both parties since the broker’s obligations can be measured in terms of the services to which you have both agreed.
Prepare for renewals early and require the insurance company to offer their renewal quote at least 30 days before expiration. This approach will allow time to evaluate the coverage and correct errors prior to renewal.
Have a renewal meeting 120 days in advance of any policy expiration so you know where you stand and you can start the marketing process if you believe your renewal terms are not to your liking.
Put together a comprehensive picture of the risks that face your company in order to properly educate insurance company underwriters. The more organized, specific and complete the submission, the better your chances of receiving favorable responses from underwriters.
Select insurers who are financially sound. Require multiple sources of evaluation from your broker to assess the insurance companies’ financial strengths, ie. Standard & Poor’s, Moody’s, and A.M. Best’s. Always remember, the least costly insurance is no bargain if the insurer goes broke.
Investigate group and/or association sponsored risk financing alternatives. Group pools, captives, or safety groups may present attractive alternatives to commercial insurance. You may need to go beyond your broker to find these programs.
Review contracts carefully. Other parties may attempt to compensate for their own inadequate or nonexistent insurance coverages via contractual transfer of risk to you.
Audit losses quarterly where there is frequency, and consider an outside audit service to provide this evaluation.
You have undoubtedly heard about or experienced a combined retrospective rating plan. Such a plan combines worker’s compensation, general liability and automobile liability into a single premium and claims adjusting/risk financing arrangement or can be purchased on a monoline basis.
While it seems simple — and even logical — my experience has been that retrospective rating plans are usually profitable only for the insurance company. Retrospective plans generally do not serve the Insured’s goal of securing optimal insurance coverage at the best price. There are options to retrospective rating programs. ICA suggests you insist on learning about them, before accepting such plans if offered by your brokers.
Review business use classifications. Autos that qualify for a “service use” classification are often misclassified as “commercial use” vehicles, generally a higher priced classification. Consider garaging vehicles in a territory with lower auto insurance rates. For example, an Insured currently garaging vehicles in an urban area might consider garaging them in a less populated, outlying area where he has other facilities.
Buy specified named perils coverage rather than comprehensive coverage. The named perils approach insures against most of the mishaps covered by comprehensive coverage, with some exceptions, such as windshield breakage.
Increase physical damage deductible. However, remember that increasing the size of a deductible only makes sense if the Insured obtains premium savings greater than the increased loss retention.
Self-insure collision on private passenger autos that are more than five years old. When private passenger autos are this old, the premium plus deductible for collision coverage begins to approach the value of the auto.
Consider dropping medical payments coverage if the majority of persons driving or riding in an Insured’s vehicle should be covered under worker compensation or group medical insurance.
Negotiate liability deductibles. A property damage liability deductible is generally easier to obtain than a bodily injury deductible. However, coverage for physical damage other than collisions should be maintained.
Review classification codes. An Insured may be entitled to a lower-rated classification.
Verify that truck driver payrolls are not included in premium computation. While driving a truck, the negligent acts of the driver are covered under auto liability insurance.
Verify that receipts from projects outside the United States, its territories and possessions, Puerto Rico, and Canada are not included in completed operations premium computation. Liability arising from completed operations outside of these areas may not be covered.
Verify that intercompany sales are not included in the computation of completed operations premium.
Check for adherence to payroll limitations. The payroll of individual owners, partners, and executive officers is limited in all states for purposes of general liability premium computation.
Make sure the payroll of office employees is not included in premium computations. In most states, overtime pay should not be included in the payroll figure for premium computation.
Verify that overtime surcharges paid to employees are not included in premium computations. In most states, the “premium” portion or overtime pay should not be included in the payroll figure used for premium computation.
Negotiate a property damage liability deductible. A bodily injury deductible may also be available.
Evaluate umbrella limits of liability to ensure limits you are purchasing correlate to your exposures and assets to be protected.
Insurance company language now includes the ability of the insured to obtain reimbursement for consultant services used during a property loss. Make sure your policy includes this language.
Duplicate valuable papers and accounts receivable records and store them off premises. This may produce a rate credit for valuable papers and accounts receivable coverage or may eliminate the need for these coverages.
Beware of per location deductibles because windstorm claims can cost you your company’s entire profit for the year. Also, consider increasing the size of the per occurrence deductible if your claims support the premium savings when compared with the expected increase in retention.
Consider an annual aggregate deductible or self insured retention.
Make sure that the cost of clearing the building site, cost of excavation, and architects’ and engineers’ fees (except the portion that covers supervision during construction) are excluded from the total contract price for purposes of builders risk premium calculation. Even in the event of total destruction, the excavating and design should not have to be performed again.
Reevaluate employee dishonesty limits that have been insured in the past. Higher limits are most likely necessary now that computer fraud and wire transfer risks can cause significantly higher claims.
Check classifications codes. An Insured may be entitled to a lower-rated classification.
Delete overtime surcharges. In most states the “premium” portion of overtime pay should be excluded from payroll figures used to compute the workers compensation premium.
Review payroll limitations. In most states the payroll of a sole proprietor, partner, or executive officer covered under workers compensation law is limited for purposes of premium computation.
Implement a deductible for medical only claims. In states where there is no approved deductible, try to implement a “first aid folder” approach which allows the Insured to pay all medical only claims up to a stated amount where allowed by law.
Require proof that subcontractors have workers compensation insurance. Many subcontractors go without workers compensation insurance when the cost exceeds their budget.
Implement loss control measures to reduce the cost of risk and take advantage of any rate credits allowable by state. Some states give a credit for having a risk management consultant as part of its safety plan. Due to the substantial rate credits associated with them, safety measures are generally very cost effective.
Verify accuracy of retrospective rating calculation. There have been many instances where the insurer has incorrectly calculated a retro premium.
Verify accuracy of premium audits. In particular, verify the assignment of payroll to the proper classification code(s), application of correct experience modifier and premium discount, and mathematical computations to assure accuracy.
Review loss data carefully to determine possible ways to control costs. This could involve special loss control programs, the placement of loss-prone subsidiaries in the assigned risk pool, etc.
Consider self-insuring workers compensation. This approach may be feasible for Insureds generating large amounts of workers compensation premium (e.g., in excess of $1 million per year in one particular state) who have a stable workers compensation loss history.
Review open claims before promulgation of any experience modifier. Make sure there are no incorrect claims and that open claims are properly reserved. Obtain the claims information from your insurance company before it gets sent to the workers compensation board.
Make sure loss data is adjusted for subrogation recoveries. Loss amounts should be reduced by the amount of recovery.
If the workers compensation audit has been revised by the insurance company, make sure experience rating data reflects the revised final audit. In many instances, the revised audits do not get filed with the workers compensation rating board.
Verify that large losses have been properly limited, such as with death or second injury fund claims. The cap on the amount of losses permitted to be included in the modifier varies from state to state.
Have your broker or insurance company calculate a test modifier (using the data that you believe to be accurate) and compare it to the actual modifier calculated by the workers compensation board. If the variance is significant, further investigation is warranted.
Confirm that nonratable elements are not subject to the experience modifier. For example, aircraft seat surcharges and loss and expense constants are not subject to experience rating.