Insurance is intended to be a risk transfer process for those things you cannot anticipate, or those losses or costs you cannot (or choose not) to bear.
During a “soft” insurance cycle, companies tend to lose sight of this principle and relax their focus on managing risk and losses. This is generally due to the ability to purchase business insurance with little or no deductible or retention, which creates a mind-set that losses “are the insurance company’s problem.” When the insurance market hits bottom and prices begin to rise (a hard market), companies that were the most lax during the soft market begin to scramble to contain costs and regain the necessary focus on managing risk.
Companies need insurance to run their business, but when it comes to purchasing business insurance, many companies cannot be certain of what their costs will be. Many companies (and those individuals charged with the task of buying the insurance) have been conditioned to view insurance as a commodity: “they’re all the same so the lowest/cheapest price is the goal each year.”
Not only is this opinion inaccurate, it’s dangerous, as every insurance policy carries very specific legal language that may limit coverage. If the entire decision is made on the basis of price, the true limitations may not come to light until a major claim appears.
The other downside to this approach is the never-ending frustration of listening to one sales person after another—all of whom have the “best deal.” The entire process is very inefficient and provides the company with no control over the strategy employed in creating the product, the pricing, or sometimes even the partners with whom they’ll be working. This is especially true when the buying decision is in the hands of one department within a company, but the services and claims management are utilized throughout the year by other departments within the company.
The soft insurance market has given some companies a false sense of reality. If your premiums are less than your actual losses, you can expect the pain to increase as the insurance market hardens.
During any underwriting process, insurance companies want to look at your losses for the previous five years. The underwriter will model your losses to get an average of what the losses have been and what the premiums will need to be to cover those losses (plus expense and insurance company profit). At this point, your costs for insurance will begin to be greater than your forecasted losses as the insurance company looks for some degree of up-side protection. The normal response is to begin shopping for the best deal you can get.
Purchasing business insurance should be a tightly controlled process and a well thought-out part of your planning for each business year.
With a “top-level-down” risk management strategy, you are less vulnerable to insurance market cycles, which gives you a greater ability to make informed and strategic decisions about insurance program structures and pricing. An accurate accounting of your performance drives the insurance products offered by the underwriters, and the true cost of your risk will allow you to determine how much of the risk you can comfortably take.
It is vital that the Risk Management Department is viewed as an important strategic partner in both providing the information that is used by the insurers during the underwriting process, but also in evaluating the products and services that will be provided by the insurer(s). The underlying goal is to manage the risk you can manage, take on the level of risk you can comfortably afford, and transfer the remaining risk to a trusted insurance partner.