It’s a risky business
3 Aug 09
The cost of insuring your business may be set to go up again but, as Steve Young explains, there are a number of ways you can manage that
by Steve Young
On top of the other challenges facing business today, you could soon be faced with rising insurance prices as well – just what you all wanted to hear! After five years of falling premiums, the insurance market is starting to bottom out. US insurers reported the first quarterly rate rise for many years, the Irish market has seen a 25 per cent year-on-year uplift, and there are now signs of the UK market showing an upward trend.
In fact, the dynamics today are very similar to the hard market “triggers” back in 2001. Then, we had low interest rates, a plummeting stock market and a failing insurer (Independent). Over the past 12 months, we have seen record low interest rates, share prices falling in 2008 and, of course, some of the world’s leading insurers had to be rescued.
To get an objective assessment of this prognosis, leading insurance broker Aon undertook a survey of the UK’s leading underwriters. The aggregated response shows that, while some are still offering cost reductions today, almost 90 per cent expect that they will be imposing higher rates before the year end. For motor fleet insurance, the upward trend has already started.
We’re not there yet. There are still some good deals to be had, but, when the market turns, you need to be prepared. Now is the time to act.
Businesses need to understand their risks and their cost drivers, and make judgement calls on how much insurance protection is necessary – deciding which are the “must have” and the “nice to have”. Controlling cost has become a routine business activity, but there is a danger that you may cut insurance cost in an area perceived as a luxury which may, in fact, be key to survival.
There may be some easy hits. It is unlikely that any business today is exactly the same as it was 12 months ago. It may have grown, or it may have scaled down. If the latter, this could offer an opportunity to reduce insurance costs. If premises have been closed or stock levels reduced, the lower sums insured will bring down the cost of material damage insurance.
A smaller workforce or fewer vehicles will positively impact employers’ liability and motor insurance. A reduced turnover and/or gross profit will reduce public liability and business interruption premiums.
Think about how your risk profile has changed. External factors may have impacted on your supply chain, or internal pressures may have led to moves which have created different inter-dependencies within the business. If you no longer have back-up facilities, for example, this creates a very different interruption exposure, and you to take this into account when deciding how much business interruption cover to buy.
Can you carry more risk at the bottom end? In a soft market, many companies insure “ground up” because insurance is relatively inexpensive. As premiums escalate, think again – can the business cope with relatively minor losses without insurance protection? Chose to accept a higher excess or deductible to attract a reduced premium. Another cost driver is your claims history, but what sort of picture does it paint?
Do some claims apply to premises that have been sold or closed,or some processes that have been discontinued? Cleanse your claims experience and make sure it is reflective of the business going forward, not the way it used to be.
When you have understood the insurance market trend, your revised risk profile and your appetite for risk retention, your insurance programme starts to fall into place.
In a hardening market, you need to sell your business to insurers. There is less market capacity, and underwriters will become more selective and more technical in their assessment of risk. You have to compete for their attention. Good terms will always be available for “quality” business, so you need to present your risk in the best possible light.
If you have developed a good risk management culture within the business, make sure you get this across to the insurance market. Business continuity plans, claims defensibility strategies, risk management awards, health and safety progress – all of these convey a message that this is a business which is serious about risk, one that an insurer would want to underwrite. The same adage applies to most marketplaces – the more competition you can create, the better the deal you can secure.
Your insurance programme should fit with your risk and insurance budget, but think beyond premium – if you’re carrying a higher deductible or electing not to renew some policies, you’ll be self-insuring more losses. Some insurers may ask you to improve your risk by upgrading a sprinkler system or installing intruder alarms, which represents another cost.
You want your insurance programme to be competitive, but it’s important calculate your total cost of insurable risk – not just the insurance premium alone – to understand the true cost.
The whole process may enable you to understand your business in a new light. It updates your view of the risks you face, and encourages you to adopt good risk management practice to get the best outcome from the insurance market. It will harden some time, that we know, although exactly when and by how much is much more difficult to predict. Either way, be prepared!
STEVE YOUNG is a director with leading insurance broker Aon Corporate UK.