Are You Paying too Much for Insurance?

Nick Desoutter

Are you paying insurance rates that are one-third to one-half less than what you were paying in the late '80s? According to Mark Lundegren, director of risk management for GoPro Underwriting Managers Inc., Richmond, Va., you should be.

With the success of the financial markets in recent years, insurers are making more money, thanks to a high return on their investment of collected premiums. Thus, insurers can accept smaller underwriting profits (the excess of the premiums charged over their costs of providing insurance) and are seeking ways to use their capital - accruing new customers.

This is good news for the solid waste insurance marketplace, which, for years, many insurers would not touch. Now, new insurers are entering the field and existing insurers are introducing new products, charging lower premiums and are willing to take on more risk.

"Anyone who hasn't checked out the insurance marketplace in the last five years should take another look," says James Cox, environmental practice leader for J&H Marsh and McLennan Inc., a New York City-based brokerage firm. "Prices are at an all-time low, and terms and conditions are flexible."

However, insurers aren't going to give you money simply because they like you. Just because you should be paying lower rates doesn't mean you are. To get the best insurance deals available, you need to be a savvy shopper and have top-notch advisers on your side.

Getting the Best Deal One way to keep your insurance costs down is to make sure you're a good risk. Insurers love a well-run organization with an effective risk management program. Because such an organization is likely to have fewer claims, an insurer can afford to charge it less.

Effective risk management techniques include safety inspections and superior training. This may mean reengineering your business processes to make them safer. Such reengineering costs could be more than matched by savings in insurance and other costs.

Another risk management strategy is avoiding risk. Consider contracting out some of your riskiest work. A good insurance broker can help develop a risk management strategy that minimizes risk and insurance costs.

Michele Ryan, principal of Ryan and Associates, a Bakersfield, Calif.-based brokerage says these factors also make a company a good insurance risk: * financial strength;

* a conservative operating philosophy;

* corporate officers with extensive experience in the business; and

* positive results in environmental studies.

The Good Broker Perhaps the most important step you can take is to get a broker who knows your business and the insurance coverages available to your industry. A good broker will get you better coverage, in the right amount, at a lower cost, and can advise you on a variety of matters affecting your insurance.

How can you tell a good broker from a bad one? Look for a broker with a number of accounts in the solid waste business. Get references from similar businesses. Consider using a questionnaire to ensure that the broker has a thorough understanding not only of the insurance business, but also of your business.

You can enlist an insurance consultant, but if you have a good broker, a consultant probably is just another unnecessary entity to pay. However, if you locate a good consultant, you can use a broker simply to formalize your insurance transactions.

Solicit bids from brokers about once every three years, Lundegren recommends, even if you are satisfied with your broker. While you owe it to yourself to make sure you are getting the best of what's out there, keep in mind that solid waste insurance is a relationship business.

There are advantages both to you and to a broker in maintaining a stable relationship. If you bid out your business too frequently, you may drive away the best brokers and end up choosing from among the lesser talent.

How Much Coverage Do You Need? Another way to control your insurance costs is by adjusting the amount of coverage bought and the risk retained. At certain times, it may save you money to accept a high deductible and pay small claims from your own funds. The alternative is to take a low deductible and let the insurer take care of both large and small claims.

Get quotes for insurance at various deductible levels, advises Lundegren, and use these quotes to determine the most cost-effective deductible. A sophisticated insurance purchaser will vary deductible levels as the business cycle drives insurance prices up and down. Your broker can help analyze how much risk to retain and how much to insure.

How high a deductible you can handle depends on your organization's size and financial strength. "A high deductible can lower a company's premium dramatically, but obviously, it's not appropriate if paying the deductible puts the company out of business," Ryan says.

Another factor in choosing deductible levels is your organization's appetite for risk, Cox reports.

One Carrier or Several? Purchasing two or more types of coverage from the same insurer can allow you to: * Reduce costs. Insurers incur various fixed costs to market, underwrite and issue policies. If you buy several policies from the same carrier, the insurer will be able to spread those fixed costs over a larger volume of insurance, resulting in a smaller level of expenses per unit of insurance. The insurer should pass those savings on to you.

In addition, if you buy two policies from the same insurer - one that is likely to generate frequent claims and one that is likely to generate only infrequent claims - the insurer can offer you a better deal on the high claim-frequency coverage, knowing that it probably will realize a higher profit on the low-frequency coverage.

* Avoid problems when making a claim. In some situations, it may not be entirely clear which of two policies should cover the claim. For example, if you have your pollution liability coverage with one carrier and your general liability with another, each insurer may assert that the other one is responsible, and you could experience delays or difficulty getting your claim paid. Having both coverages with the same insurer will alleviate this conflict.

Lundegren suggests that consultants get their general and professional liability coverages from the same carrier. Also, if your business owns a large fleet, you should try to purchase your auto and general liability policies from the same insurer.

Cox says he will try to place all of a big client's business with one or two carriers, in order to realize the economies of scale. However, only about six carriers have the expertise to offer this type of full-service coverage.

It is not always possible or practical to get more than one type of coverage from the same insurer, because often insurers specialize in certain lines and offer no coverage or inadequate coverage in other areas.

Identify one or more major areas of exposure, Lundegren recommends, and make sure you get top-quality coverage in that area from a leading insurer. For example, if you employ a large workforce to transport non-containerized waste, then workers' compensation should be a primary concern: You need a cutting-edge workers' comp policy with managed care components and possibly one of the several innovative financing arrangements available. Once you secure this high-priority policy covering your major exposure, then build the rest of your insurance program around it.

Evaluating Carriers Of course, you're looking for an insurer that will give you the coverage you need at a good price. But price is only one of many factors to consider when evaluating an insurer.

A number of organizations rate insurers' financial strengths, the best known of which may be A.M. Best, Oldwick, N.J. Best's ratings and those of the other agencies give you a good idea of the likelihood that your insurer will go belly-up.

Ideally, your insurer should be rated in Best's "A" range. However, Lundegren says, alternative risk-financing mechanisms may be acceptable for larger operations if they meet your needs better than any of the A-rated insurers.

Ryan never places a customer with an insurer rated lower than B+. She also warns companies to exercise extreme caution before dealing with off-shore insurers, because they have been known to offer extremely low rates, but "you may just be buying a piece of paper," she says. "When you come to make a claim, the insurer might not be there."

Other issues to consider include the insurer's customer service quality and whether it has a reputation for contesting claims. In many ways, when you buy insurance, you are buying the insurer's response in the event of a claim, Ryan explains.

The key is your broker's leverage with the insurer. How much business does the broker do with the insurer? Your insurer will be more responsive if your broker might take a large block of business to a competitor. For example, Ryan recalls one insurer that had always been good in responding to claims. Then, all of a sudden, "it seemed like [with] every claim, they dragged their feet." When Ryan discovered that the insurer had changed its claim personnel, she made sure her concerns were handled before she placed any more business with the insurer.

Renewing: New Face or Old Friend? When renewing your insurance, you'll either stick with your present insurer or try a new one. Ryan suggests considering switching to a new insurer when her customer's and the insurer's philosophies just don't fit. Otherwise, she operates on the "if it ain't broke, don't fix it" philosophy.

If she hears of a better deal, she will discuss switching with the customer even if the customer is happy with their present insurer.

But, before switching, customers should understand the risk that they may not be as happy with their new insurer.

There are two types of insurance customers, according to Cox: Those who shop every year, seeking the lowest price, and those who cultivate a long-term relationship with an insurer, trusting that the insurer will be there for them when the "big one" hits.

Cox recommends that organizations consider the full package of services provided in addition to the price. If prices are driven too low, insurers may leave the marketplace, making it difficult to get good coverage.

If you switch insurers, make sure there are no holes in your coverage. For example, you may need to make a claim when you are covered by your new insurer, even though the event causing the claim happened when you were covered by your old insurer.

If a policy is written on a "claims-made" basis, as many are, there may be some question about who is responsible for the claim or if it is covered at all.

A good broker will ensure that your policies are written so there are no holes in your coverage.