For the first time in decades, skyrocketing insurance costs threaten the ability of businesses to follow through on their growth and expansion plans—and sometimes even to meet their basic obligations. Even before the global pandemic, businesses were facing steep increases in premiums coupled with dramatic reductions in coverage. This situation was only worsened by the onslaught of COVID-19. The “hard market” drastically changed the business landscape and created both immediate and near-term liquidity issues. Many organizations are challenged to control the cost of insurable risk while remaining competitive, seeking ways of doing more with less. Fortunately, there are steps that businesses can take to mitigate these challenges.
Questions to ask:
- Have you recently taken a close look at insurable value estimates for your organization?
- Are you putting your best foot forward in presenting your risk profile to the insurance market?
- Do your deductibles and retentions reflect your organization’s current risk appetite?
- Are you getting access to the right variety of potential insurers?
In this challenging period, there are two areas of focus for controlling costs in insurance risk: 1) Things to Do Right Now and 2) Future Preparation.
Things to Do Right Now – Your business is constantly changing, especially in recent months, along with the dramatic changes in the social and business environments. So, re-evaluate where your exposures are and how well your current insurance policies respond to potential claims. What are your potential rights of recovery, and does the insurance policy contain the right deductibles, limits and premium pricing to be economically appropriate?
Focus on evaluating the underwriting data provided to the insurance markets at the most recent renewal, which helps with identifying strategies to reclaim premium back to operations. The premise is straightforward. Insurers determine premium based on the exposure of risk transferred to an insurance company. If the exposure has diminished (e.g., employee headcount, sales, payroll), then so should the premium. If the business interruption estimates have changed with closures, sales reductions or elimination of continuing expense, this creates the possibility for a new assessment of the value for updated premium calculation.
Premiums are also determined by loss history. It could be worthwhile to take a closer look at loss reserves and open claims files with the goal of presenting a more favorable view of an organization’s claims history.
Future Preparation – Put a renewed focus on how you position the business to traverse the crisis and set up for success on the other side. Your organization can take a fresh look at how it takes on risk, and how those risk-taking decisions are made. This fresh look will consider the use or expansion of alternative risk vehicles, including captive products, as well as reassess the exposure base and how the organization proactively presents its risk profile to the insurance market to generate competition on pricing and terms. Finally, it will reassess how you access the insurance market: Are you facing structural or regulatory barriers that separate your organization from insurers willing to provide coverage?
By bringing these key elements of insurance risk into clearer focus, your business can better control costs and pave the way for future success. This is especially important when faced with the dual challenges of a hardening insurance market and potential liquidity issues.
Steps to Control Costs in Insurance Risk
Things to do right now
- Update underwriting exposure data (e.g., business interruption values, payroll, headcount, revenue).
- Do more with less—consolidate purchases of excess insurance capacity, such as:
- Shared limits for Directors & Officers, Employment Practices, Crime and Fiduciary;
- Multiple-year, single-limit policies.
- Re-evaluate coverage limits purchased.
- Consider lessons learned in recent history—by you or by your peers.
- Ask: Will your business respond to a business interruption in the same way next time?
- Actively drive down self-insured and insured claim reserves via aggressive file review and case management.
- Understand how and where your organization retains risk.
- Are your retentions and deductibles consistent with your organization’s appetite for unbudgeted losses?
- Should you consider higher deductibles?
- Work to access the widest possible variety of potential insurers to generate the best competition for your business.
- Take steps to make your organization’s risk more attractive to insurers than other organizations in your peer group.
- Place competitive pressure on your brokers to improve their performance.
- Consider the use, formation or expansion of a captive insurance company.
This article originally appeared in BDO USA, LLP’s “Insurance Risk & Recovery” newsletter (Fall 2020). Copyright © 2020 BDO USA, LLP. All rights reserved. www.bdo.com