7 Habits of Highly Successful Insureds

Paul Broussard, cyRM
The emphasis in commercial insurance is typically what an insurance broker can do for your insurance and risk management needs. However, if business owners were more informed insureds, they’d have better success with their insurance program. With that being said, a Highly Successful Insured will…

1. Select, Then Trust Their Broker

From a new business just looking to procure insurance for the first time, to a large national company, far too often I see businesses try to pit several insurance brokers against each other in order to find the best insurance program for the best price. Their belief is that if they get 2 or more brokers to compete for their insurance program, they’ll get the lowest price available. Pitting two brokers in competition against one another to deliver the best result is not much different than having two CPAs prepare their taxes or having two attorneys represent them in a legal battle, and then choosing to compensate the one that brings the best result in that isolated scenario—it just doesn’t make sense. The marketing process becomes convoluted with multiple brokers in the marketplace. Underwriters get multiple submissions which each describe the business operations differently, and inevitably, no matter how much verification they do, the underwriter may still feel uncomfortable with believing what one broker says over the other and will tend to err on the side of caution.

Ultimately, an insured should want their business portrayed in the best light, while still insuring for their prevalent exposures. If multiple brokers tell different stories, the underwriter will be cautious and choose to focus on the description that paints the insured in the worst light. For instance, one broker representing an insured in a risky industry will take the time to explain to the underwriters why this insured is considered best in class—they will give a narrative of their operations and claims history, while another broker may simply let the underwriters assume their operations are identical to the rest of the industry.

Instead, a successful insured considers his insurance broker as a valued advisor—a balancing leg of their advisory stool, next to their attorney and their accountant. A successful insured researches, interviews, or gets referred their advisors, and then trusts them to manage and control their total cost of risk.

2. Understand That Price Is the Easy Part

Why do you buy insurance at the end of the day? It’s not because you want to buy it like you would want to buy a luxury sports car–But insurance isn’t a commodity, so why do insureds treat it as such?

Price is the easiest part to get to—all you have to do is eliminate coverage to reduce the cost. One broker may have a better price for your insurance program, but price isn’t the reason why you buy insurance is it? Sure, you may buy insurance because it’s statutorily required by the state like your auto or work comp insurance. It may even be required by your contracts like general liability or professional liability coverage, but at the end of the day, you don’t buy insurance because it’s a good deal, do you? At the end of the day, you don’t buy insurance for price—you buy insurance for coverage, and you expect it to work when you need it.

So if you’re looking at price alone, ask yourself why it’s that price. Is it because there are several exclusions on the policy that limit the scope of coverage? Or even worse, you find out after a claim that your operation wasn’t accurately described by your broker, and because the strict carrier they placed you with never contemplated that exposure when they underwrote the risk, they deny the claim due to material misrepresentation of the facts. Don’t get me wrong, price is important as it protects your bottom line, but if your policy doesn’t work the way it’s intended to, then what good is the price you paid? A successful insured knows that an uncovered claim will be a lot more devastating to their bottom line than the price of their quality insurance program.

3. Know that More Information Is Better

Brokers often get a request to quote insurance based only on the name of the business and their industry. A knowledgeable broker will ask questions about their insureds, and a successful insured understands that the more information they give, the better. It pays to take the time to answer the questions truthfully and thoroughly.

For example, you could say that you want to insure a fleet of vehicles—you could supply the types of vehicles and the driver information which is about all that it takes to get a quote. However, you might get a much better result if you let your broker know that each driver is highly vetted, has to complete a thorough training with experienced drivers, and that each vehicle is equipped with a backup camera.

In the same way, if you omit a small part of your operation because riskier than your main operation, then you may be inadvertently barring yourself from coverage. As risk managers, we want to make sure that you are properly covered at the end of the day, and we can only use the information available to us. If your website advertises to your customers that you perform certain services, then an underwriter can only assume that your business carries out those services. If, in fact, you haven’t performed those services in years or that you subcontract those services to insured third parties, then that is a completely different story and makes you more insurable. A successful insured knows that more information is better.

4. Not Market Their Insurance Every Year

Most insureds believe that their insurance program needs to be marketed every year to every insurance company in order to make sure that they are receiving the best rate. While that is certainly a common thought (even for some insurance brokers), it doesn’t necessarily achieve the best long term results for an insured. Insurance companies request 5 years of historical loss (claims) history, and when they review that history, they see how long an insured has stayed with each insurance company. If they see that an insured has changed insurers every year, they can only assume that they are switching for price and that the same fate will happen to them at next year’s renewal. Because they can only reasonably expect to have the insured for one year, they can’t get aggressive with their rating because one small loss may ruin the account’s loss ratio (the ratio of claims to premium). However, if an underwriter sees that an insured has only had one insurer in the past 5 years, they can get aggressive with their rating knowing that even if they have to pay out on a small claim, it’s more than likely they’ll have a number of claims-free years to more than make up for it.

If an underwriter believes they may only have an insured for one year, they won’t spend time getting to know and understand the risk. As an insured, you want to put yourself in the best position you can with every underwriter that sees your submission. You want every underwriter to take their time to feel comfortable with the risk, and your submission needs to be worth their attention. If an underwriter sees your submission every single year, but never writes your insurance program, then the underwriter will leave it at the bottom of the stack year after year.

Insurance companies retain a file of every account’s loss history from previous years. So, if you had a particularly large claim six years ago that doesn’t show up on your five-year loss history, the company will still have knowledge of that large claim. They rarely choose to ignore a significant claim, even if it’s not within the last five years. It is no longer a question of what rate you will receive, but if you will receive any quote at all. Is it really worth every company seeing your loss history each year if the renewal is only 1%-2% more than last year?  An informed, successful insured knows the value of strategically marketing their insurance program only when it’s warranted.

5. Invest in Risk Management

Insureds that take control of their risk management program tend to have better results than those that do not. If you’re not investing in risk management, your total cost of risk will be left up to chance alone. Your total cost of risk is comprised of insurance premiums, deductibles, self-insured exposures, risk management expenses, and even uncovered claims.

Insurance companies make loss control recommendations because they have access to the law of large numbers, and with the law of large numbers, they know the risk management techniques that provide results. When an insured implements risk management procedures, they’ll usually receive better terms, which will reduce their expenses. A successful insured understands the value of risk management and implements risk management procedures in their business.

6. Not Use Insurance as an ATM

The purpose of insurance is to indemnify. The principle of indemnity is to return the insured to the same financial position they enjoyed immediately before the loss—no more and no less. However, if an insured uses the insurance policy like a home warranty, they will experience complications at each renewal. You might think that a couple of small claims here and there might not make much of a difference. If you pay the premiums, you should be getting the benefit of the claim payments if you experience a loss, right? Frequent and small claims, while seemingly harmless, give underwriters insight into the operations of an insured that might indicate a lack of commitment to safety or risk management.

Furthermore, small claims add up over time, and they dwindle down the loss ratio of an insured, which essentially means the profitability of an insured over time. For instance, you may think that on a $10,000 annual premium policy, two $3,000 claims in a policy year would still make the insurance company a $4,000 profit. However, the administrative expense of the two claims, not to mention the underwriting expenses, loss control expenses, and normal overhead experienced by any business, might amount to well over $10,000 annually. Because of this, you may be surprised when that $10,000 premium is now $12,000 at renewal.

Typically, a carrier likes to see the loss ratios less than 40% on a 5-year basis, with loss ratios between 40%-60% usually making accounts unprofitable depending on the insurance company. If your loss ratio is over 60%, you are almost assuredly unprofitable for any insurance company. An insurance company is not unlike your business—if you were losing money by spending too much time or resources on a specific client, you would either raise their rates or stop doing business with them. With that being said, a successful insured knows that insurance is for catastrophic losses and does not use their insurance policy as an ATM.

7. Use Their Broker as a Key Advisor in Business Decisions

Insureds often get advice from several sources before reaching out to their insurance advisor. They may consult with their attorney and their accountant to see how a business decision will affect them from a legal or tax standpoint. They may have already done a feasibility and profitability analysis on a new business operation, but their last thought is usually how this change might affect their insurance. A change in operation may need to be cleared by the insurance company before the new operations are carried out. There could be pricing implications as well depending on how risky the new operation is in comparison to the current operation. If the profitability analysis was initially positive, it may not make sense now.

Insurance companies have certain appetites for industries and risks within those industries. Your current insurance company may not want to provide coverage for your new risk, but another insurance company might have an appetite for the new risk. With enough time, your insurance advisor will have the ability to re-market your business based on the new exposure. Any change in pricing, terms, and conditions will be well communicated to you so that you can make an informed business decision. For that reason, a successful insured will use their insurance broker as a trusted advisor in their business decisions.