Insurance & Risk Management
Insurance and Risk Management was today's CFO/Controller Roundtable topic. Marlys Schmitt, Corporate Insurance Manager for Expense Reduction Analysts, presented on this topic, which addressed reducing risk management costs.
Excerpts from the presentation and question/answer period we think you may find useful as you consider your insurance programs follow:
What tools do you recommend to evaluate your coverage?
Benchmarking is a powerful tool to help gauge how your organization is doing, relative to peer group payments on premiums. Benchmarking analysis can contain factors including comparisons on specific coverage, insurance limits, deductibles, premiums, and professional indemnity. To see examples of benchmarking comparisons, and to get an idea of how to structure this process for your organization, please refer to sample benchmarking charts on slides #13-18 of the presentation, which can be found here.
Can benchmarking be done for large public companies, as well as smaller or privately held companies?
Data is available for any of these situations. Benchmarking is a universal tool for a complete analysis of any type of company, industry, size, or market.
How often should I re-evaluate my policies and conduct benchmarking analysis?
As a general rule of thumb, re-evaluate every 3-5 years unless the market conditions change significantly. In that case, re-evaluate every 2-3 years.
What other tools do you suggest?
A Conceptual RFP is another effective assessment tool. Ask your broker and other brokers not go to market, but to put together a conceptual proposal poviding indicators of the best program they can offer. Once you have evaluated the proposals and interviewed the brokers, it is then appropriate to choose the insurance program and broker that are the best fit.
How much due diligence do you recommend on providers?
Rely on your broker for assistance. Brokers have up to date information on the financial condition and reliability of insurance companies. If an insurance company is downgraded, your broker should let you know. The broker should always place you with an A or A- rated company, and should fully disclose if a B rated company or lower is in play.
What are your thoughts on using the services of a broker vs. an agent with an independent firm?
Insurance is a relationship business. Evaluate the value of the relationship as part of the process. If you go with an agent, ask for transparency. A broker can act as an agent, too.
How can I be sure my broker or agent is showing me all of the markets out there? I have found I am shown one or two markets, and after a bit of pushing, I am shown three or four others that are not advertised?
Read extensively. There are certain markets with strong appetites for specific profiles. For example, there are markets that focus on not-for-profits, manufacturers, or other groups. To the best of your ability, do research to find those that fit your profile/needs.
Are there advantages to insure through organizations or associations to which your company belongs?
Insurance through a group or organization can have advantages, but does not always offer the lowest cost alternative. The coverage is written for the profile of the membership, and can help sort out priorities and gain some group cost savings. One word of caution would be to investigate if one or a small number of group members have significant claims. These members may raise the rates for the whole group.
Do all insurance companies write policies and pay a commission?
You can ask the company to quote without including a commission. From there you can negotiate the fee. Do be careful to include all of your policies in the brokerage fee.
When should you start the renewal process?
Three to four months before your renewal date. This will give you time to get some competitive pressure between brokers. You may want to ask for a proposal by a certain date, and invite brokers in during a specific week for a one hour presentation to lay out their services, programs, and premiums. With a three to four month window, you should be able to get the information in hand to make an educated decision, and have also gained a better ability to negotiate. Remember, when you are new business or have invited competition into the quote, you are in a better position with the underwriter to get the best prices.
When do industry rates change?
Treaty reinsurers' contracts renew in January and July, which is when price increases get passed along from firms which provide reinsurance. To anticipate increases, ask your broker what is happening with the treaty reinsurers, and if and when to anticipate increased costs being passed on to you.
Should you try to re-negotiate around the treaty reinsurers contract dates?
You might try to extend existing coverage at a lower rate, but that may not work. You might think about cancelling your coverage and reinstating around the contract dates. If you do, take note that the short rate cancellation charge is typically 10 percent. In reality, the insurance company has control.
What is the market rate for fee based services?
That depends on the size of the account, the industry, and other factors. On average the commission basis is 12.5 percent. It may be possible to negotiate below that.
When renewing an existing policy, any suggestions on how to get the best pricing?
Get a face-to-face with the underwriter – that can go a long way in negotiating coverage and rates. Demonstrate your interest in long-term programs and present efforts your company has put into place to mitigate or prevent claims. These efforts could be policies, procedures, or employee training that reduces risk. Reporting claims on a timely basis can also be to your advantage. The longer a claim goes unreported, the higher the cost typically becomes.
Do you advocate legal review of policies?
Many companies do have a review in place. It depends on your company, the nature of the business, and the complexity of the coverage.
Will you expand on the current economy and the impact on policies/coverage/premiums?
When the market is soft, it translates into reduced costs being passed on to the buyer. Insurance companies are aggressive to write policies. This is when your broker can help you compare and evaluate. There may be an opportunity to consider buying extra coverage, and then remove it when the market becomes harder. An example would be in the amount of a large umbrella policy. Also note that in soft markets, major insurance companies can also be downgraded and your broker may advise change accordingly.
What is your prediction for the market?
We see the market continuing to be soft until the end of this year, and anticipate they will become harder next year. There may be opportunity before the end of the year to realize cost savings.
To view a copy of the presentation, please click here.
