Insurance is rarely considered a topic of enjoyable conversation, even in the business world. Although a very important and necessary part of successful operations, insurance products are often complicated in application, ambiguous in interpretation, and can be structured and priced inconsistently. Add to this the current challenges brought by COVID-19, combined with significant price increases and reductions in available coverage, it’s no wonder people find the subject matter exasperating.
Through this series of articles, the goal is to demystify the complexities of insurance and ultimately provide you with the knowledge to create a cost-effective insurance program for your business.
The first step is to make sure you have an appropriate methodology for how your company will design its insurance program. The delicate balance between having too much or inappropriate coverage weighed against not having enough is all too common. Experience has taught us a thorough understanding of what drives your company’s financials provides the best structure.
For that reason, we created the “architect’s perspective” to buying insurance: creating an insurance blueprint to capture the risks, insurance, retentions, claims, and coverage structures best suited to the client’s needs. This is how we transform your insurance program into a quantifiable asset that delivers value and protection for your balance sheet and income statement in the short and long term.
The process is started by quantifying your company’s specific risks and the insurance coverages relevant to those risks before completion of carrier submissions. This approach is more comprehensive than what is customarily done because it involves reviewing the major aspects of your business operations, their corresponding risk exposures, and how each exposure is currently handled — avoided, mitigated, transferred, or retained. From this, a picture of your total cost of risk emerges. Next, a thorough understanding of your assets, liabilities, the drivers of your income statement, and how risks and exposures can impact your results is obtained.
What will your blueprint include? The answer is as unique as your individual circumstances; however, there are four basic elements:
Identifying and quantifying the risks you face in the context of current and future business operations;
Outlining how you choose to handle the risks, considering which approach best suits your situation, and keeping in mind that not all risk is insurable;
Defining what is within your control that impacts your cost of risk;
And purchasing appropriate policies that deliver the quality coverage you expect at the optimal cost.
On this last element of your blueprint, remember one key point — just because a policy offers the lowest premium doesn’t automatically equate to the lowest total cost. Issues such as misunderstanding of policy requirements necessary to trigger coverage, ambiguity in policy language in regard to how coverage responds to a loss, the insured’s cost of legal fees to interpret these ambiguities, and claim payments could ultimately make what appeared to be the least expensive premium the most expensive. Other considerations such as sub-limits, lack of claims management strategies, and loss control also factor into this equation.
Why is your blueprint so important? Simply put, your blueprint provides the contextual framework to help you manage your insurance. It also provides an effective tool to measure achievable outcomes in the attainment of short and long-term risk management goals.
Your blueprint identifies components and proactive initiatives that can help you control your insurance premiums and total cost of risk. These include safety and loss control initiatives, monitoring of sprinkler and alarm systems, claims management, and opportunities for contractual risk transfers.
Whomever you entrust with your insurance program, it is important to establish regular and productive communication. All too often changes that affect the cost of insurance are often not reviewed until renewals. Items such as operations, property additions and deletions, and claims activity should be discussed. Waiting until renewal can be a costly mistake if something gets missed during the policy period. If needed, your blueprint will be adapted to accommodate changing circumstances and/or take advantage of new opportunities.
When it comes to the purchase of specific insurance policies, there are many elements to consider. According to recent postings from Business Insurance, industry sources are seeing rate increases, capacity reductions, and tighter underwriting restrictions for 2021. Those increases vary by line of coverage and client-specific factors, but range between the high single digits and mid double digits. Unfortunately, according to the experts, retail real estate is one of the industries that was hit the hardest. Although COVID-19 has driven exclusions for pandemics and communicable diseases, new exclusions are emerging for strikes, riots, and civil commotion.
Your blueprint will also make sure policies address risk exposures in the manner best suited to you. The process includes property valuations, coverage limits, and potential “gaps.” An example of an often overlooked ‘gap,’ which can be very costly, is cyber risk exposure. In today’s world, cyber risks apply to every business, not just credit card companies or data collection services. Standard operational practices involving data exchanges over many digital platforms such as email, social media, and electronic storage of intellectual property and confidential information can be susceptible to data breaches.
If you are not properly insured, these breaches can become very costly. All states have some form of data breach laws that require entities to notify their customers and other parties should a breach occur. According to a 2019 Cost of Data Breech Study by IBM Security/Ponemon Institute, the average cost of a data breach has increased by double digits during the last five years. The study concluded that in an average data breach, approximately 25,575 records are affected. At a per record cost of $242 in the United States, this equates to in excess of $6.1 million in out-of-pocket costs. Can you afford not to be covered?
Insurance policies are one of the most common ways to transfer risk, but do your policy forms provide all the coverage you think you have? Next in this series, insurance policy terms and forms including sub-limits, retentions, coverage triggers, and exclusions — all very important considerations when buying insurance — will be discussed.
Managing risk cost-effectively requires strategic discipline and planning implemented through a structured process. Your insurance blueprint and its strategic implementation are the best ways for you to capitalize on two ROIs — return on investment and return on insurance.
So, the next time the subject of insurance comes up, don’t shy away from the conversation. Discuss the value of an insurance architect that puts you in control of your total cost of risk — now and for the future.
— Mary Pipino, executive vice president of Beecher Carlson Insurance Services
This article was originally published in the February issue of Shopping Center Business magazine.