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TO AVOID GETTING HURT "Let's Be Careful Out There" This quote from Hill Street Blues is appropriate for anyone operating in today's insurance marketplace. The cops from the TV show were about to enter the gritty streets of the Bronx; that may be a little safer than venturing out into the world of business insurance today. Prices are rising, coverage is being cut and there are security issues all over the place. It's no secret that the cost of business insurance is rising fast. Property, general liability, vehicle insurance, directors and officers liability -- all are in a price spiral. Lurking in the background as well is a workers compensation iceberg. Comp has been sedate for many years; CFOs say thank you for that since comp is often the single largest insurance expense. The cycle has turned on this line as well, and it is slowly, gradually raising to the surface, to be a huge problem shortly. EVASIVE ACTION Business owners know they have to search for ways to reduce the cost of their insurance -- it would be negligent not to. The problem is that the nature of insurance is such that, without care, you can easily go from the frying pan into the fire. Insurance is only a piece of paper providing evidence of a promise. What can get lost in the quest for lower price is: 1) what is being promised (policy terms and conditions), and 2) who is doing the promising (insurer financial strength and reputation). The insurance bargain is a trade-off between the three critical items, cost, coverage and security. The most secure of the insurers, say AIG for example with its fortress-like balance sheet, know they can command a premium price for their products. These companies are the most aggressive in raising premiums, and they are also cutting back on coverage terms as the lack of competition in their segment allows them to. So, you go after security and you end up with cost and coverage problems. The lower tier insurers see an opportunity to increase market share at a price lower than what the AIGs would charge (but still higher than they were able to charge in the past) so they market to the company owners and managers who won't or can't pay the higher price. But these insurers have potential security issues. It is not an easy matter, either, to correctly gauge the strength of an insurer. The most prominent rating agency in property/casualty is A.M. Best. A rating of A -- is called "excellent" by Best, and does in fact sound secure enough. However, an A -- is marginal, and over the years many such rated companies have descended into insolvency in a matter of months. (A -- is not as close to the top as it sounds since above it are A++, A+ and A). The most recent example: this year Legion, an A -- company only a few months before, was taken over by the Pennsylvania Insurance Department. So you have to know what the ratings mean and the context they are provided in, have additional market intelligence and consult other rating agencies as well. We use Standard & Poor's and Fitch in addition to Best. Another security issue involves the use of "non-admitted" insurers. The so-called Excess and Surplus Market, through which non-admitted insurers are accessed, is a safety valve when the standard market cannot meet all the insurance needs of business. This segment is growing by leaps and bounds now. Non-admitted insurers are legal, approved writers in the various states they operate, but they function outside of the normal regulatory framework. This means the state insurance departments will not intervene in any dispute and the state guaranty funds, which pay claims of insolvent insurers, will not apply. It also means that they can offer coverage terms which do not come under any regulatory scrutiny at all. For example, this segment of the market can apply absolute terrorism exclusions on property policies, whereas regulated insurers are limited as to the language they can use when addressing this exposure. HIDDEN COVERAGE PROBLEMS The most pernicious of the three critical items is coverage. An insurance proposal is a couple of pages, but the policies which provide the actual terms of the contract are hundreds of pages. Only one or two pages per policy are dedicated to the "coverage grant," the part that tells what IS covered. What's on the other pages? Exclusions, Conditions, Limitations ..... Therefore, it's extremely easy to buy a deal which appears reasonable on the surface, but is not because the terms and conditions are inferior and you don't know it. Some will buy the cheap policy and hope for the best -- not good strategy. High cost, weak security, poor coverage. Those can appear to be the options. Move away from one problem, directly into the path of another; characteristics of a minefield. WHAT TO DO As insurance becomes a large item on your income statement, you must test the market. You owe it to yourself and other company owners. If you simply shop for price alone, though, you will be hit by one or both or the other constraints, coverage or security. In the soft insurance market of the past, it made sense to simply pass off all the risk to an insurer; it was cheap enough to do. Now you will need to put more thought and effort into the following risk management components: Loss Control -- preventing or reducing the underlying losses Risk Transfer -- managing the flows of liabilities in business contracts Loss Financing -- restructuring the insurance program so that you assume more risk at the low end, using the insurance mechanism for it's original and real purpose, severity Top managers adapt to new conditions. Two concepts that have infinitely more real meaning today than two years ago: CORPORATE GOVERNANCE AND......RISK MANAGEMENT. Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it. (C) 2002 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution). Contact us for risk management strategy and implementation. Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process. The above is intended to be general information, and should not be construed as specific recommendations. Other Articles: INSURANCE
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