Insurance Cost Containment for a Challenging Insurance Market
Even in today’s hard insurance market with skyrocketing premiums, there are viable alternatives to minimize insurance costs while providing adequate protection.
Every organization wants to maintain adequate catastrophic protection and at the same time, keep insurance expenses down. The current insurance market is the most challenging market in living memory with premiums increasing significantly across the board. There are, however, pockets of opportunities to moderate premium increases. Here are some practical techniques to help a company evaluate and control its insurance program expenses. Review Property Insurance Limits to Ensure That Values Are Based Upon Proper Insurance Valuation Methodology. In the current insurance market, insurers are paying close attention to establishing that insured property is valued adequately. We have often found that improper valuation methodology is used. Using improper valuation methodology can result in your insurance being placed in the surplus-lines market at higher premium rates and more limited terms and conditions.
Neither original cost, book value, or market value should be used to determine insurable value. Begin with what it would cost currently to rebuild your insured building with like-kind and quality and what it would cost to purchase new business personal property, such as machinery, equipment, furniture, fixtures, stock, and supplies. If you elected to insure on a replacement cost basis, there should be no deduction for physical depreciation. If you elected to insure on an actual cash value basis, the costs to rebuild your building and purchase new personal property should be reduced to reflect wear, tear, and deterioration, generally based on the expected useful life of the property.
Consider Increasing Deductible Amounts to Reduce Premiums. It is sound risk management practice to carry insurance with limits of liability that will protect the organization’s assets from a catastrophic loss, while assuming the largest deductible or self-insured retention the organization can afford without jeopardizing its ability to continue to operate. It might be appropriate to evaluate whether using higher deductibles effectively curbs increases in premiums. Analyze the added financial risk vs. the reward of more available cash for operations with higher deductibles. If you accept the consequences and emphasize financial protection for a catastrophic event vs. emphasizing coverage for smaller losses, your insurance premiums should be less than they otherwise would be.
Property insurance is most frequently considered when looking at higher deductibles to reduce insurance premiums. Premiums for other types of insurance, however, can also be reduced by deductibles. For example, if your company has a large vehicle fleet, the cost of automobile insurance can be significant. By increasing physical damage deductibles or self-insuring this exposure, you can assume more risk of a known magnitude and save on premium costs. Evaluate your past loss experience, examine how many vehicles you have, consider how many may be parked at one location and thus be subject to a single loss event, and calculate the premium savings vs. the increased assumption of risk.
There are different methods of employing deductibles to reduce insurance premium expenses. Large companies should evaluate different plans such as flat deductibles, annual aggregate deductibles, and franchise deductibles. Keep in mind that to realize your immediate and long-term plans with higher deductibles, you need to employ strategies for preventing and controlling loss exposures.
Not All Insurance is Necessary. An organization’s desire to carry insurance for certain exposures may have little to do with actual risk to the organization. Review past losses and evaluate the likelihood of future losses occurring for given exposures. Examine what the maximum financial impact could be for a single loss as well as for all losses incurred in your fiscal year and determine to what extent the risk could be assumed. What is the worst-case financial scenario from not having certain kinds of insurance? Make sure you are not insuring against exposures where you are already sufficiently protected by your business practices. Consider the following example: A firm was maintaining expensive insurance for loss of money and securities. For the amount at risk, they could certainly afford to absorb a loss. In this situation, the likelihood of theft was remote considering the physical and internal controls, so it made sense for the firm to eliminate the coverage and its substantial premium.
Consider Alternative Insuring Arrangements for Equipment & Machinery. If certain types of equipment are more readily available, consider insuring for its "actual cash value" that would fund its replacement with used machinery or equipment rather than insuring for the cost of new machines. This applies to machinery and office equipment such as computers and copiers. Be aware that "replacement-cost insurance" is collectible only if the damaged property is actually repaired or replaced with new property. If you would not replace that piece of equipment with new equipment, then the extra premium to insure for replacement cost provides no extra value, because the insurer will settle the loss for actual cash value.
Loss of Business Income. Some businesses can continue to generate all, or most, of their pre-loss revenue stream following an event that damages or destroys a location and makes it uninhabitable. This tends to be the case for multi-location businesses that can shift operations to one or more other locations. and for businesses whose employees can effectively and efficiently work from their homes, thereby keeping sales and revenue from being negatively affected for more than a short period of time. If such alternate operations would cost more than pre-loss operating costs, businesses can purchase Extra Expense insurance to cover the extra costs during the expected period of recovery. This insurance, which can be written with a waiting period or dollar deductible, should be much less costly than purchasing Business Income insurance which, generally, must be based upon at least one year’s estimated gross earnings.
Some of these techniques may not be appropriate for your company. Each organization's particular circumstances are different. However, being proactive has its rewards. By evaluating viable and financially attractive alternatives, you can be in a better position to make informed decisions that minimize insurance costs and maximize protection.