An essential part of spring cleaning is sorting through what you have, deciding what needs to be kept, and throwing out what can safely be eliminated. The tidy end result lets you move forward in the best shape possible.
An annual “spring cleaning” of insurance coverage is equally valuable for a business operation. Whether the economy is booming and cash flow is substantial, or times are tight and shaving costs is essential, a business should step back at least once a year, take a look at its assets, and evaluate its current risk management strategy. The goal is to make sure the company is maximizing its benefit from premium dollars.
In addition to involving internal experts, such as legal counsel and accountants, a company may also benefit by working closely with its insurance agent and carrier to understand both exposures and the insurance options available. The following list will help start the process.
Four Factors to Weigh
No one wants to pay more premium than absolutely necessary. But when a loss occurs, you also want to have the right coverage so there are no unpleasant surprises. As a guide, business owners should consider the following four factors when making insurance decisions.
1. Asset Values
The premium for property insurance is linked to the value of the asset covered, so paying attention to current values is an important strategy for controlling costs. Whether the asset is a barge, a pier or the building the business is run from, property values are subject to change over time. That means keeping the same policy value year after year may leave a business either under or over insured.
For example, the pricing for vessels has been on a roller coaster since the economy contracted sharply in 2008. Today, the value of commercial vessels has recovered somewhat and recreational boats have stopped deteriorating, but small luxury yachts are still under tremendous pricing pressure. In addition, the replacement value of vessels in new and used markets are often driven by the price of steel, which has been rising from the pressure of overseas demand.
Similarly, the cost to replace physical structures such as docks or buildings fluctuates with the price of materials and labor, and is also linked to the rising and falling fortunes of the construction industry.
Some asset values are easier to determine than others. There are multiple sources to determine the value of a building, such as industry estimates of construction costs per square foot. A pier’s value similarly can be determined by having someone provide an estimate of what it would cost to replace.
Vessel valuation, however, can be trickier, since many vessels are specialized for certain jobs or customized in ways that make the used market an unreliable guide. Trade publications and even conversations with competitors can be helpful, but the most accurate answer will typically come from a professional survey. To avoid the cost of an independent survey, vessel owners sometimes can turn to insurers that have surveyors on staff.
2. Deductible Levels
As a theoretical matter, deciding on a deductible level is all about the amount of risk a company is comfortable taking on and its ability to shoulder the burden of coming up with the cash if a loss occurs. On a practical basis, however, it is important to look at the interaction between the level of deductible and the premium cost, as well as the company’s expected number of claims.
Take an owner who can easily afford to cover $5,000 in costs if something goes wrong, but who wants to save on premiums by raising the deductible to $25,000. The key question is not only can the owner afford that level of out-of-pocket expenditure, but also how much will be saved annually by taking on that additional risk? If the savings is only a few hundred dollars each year, is it worth the added worry?
On the other hand, trying to avoid all risk by buying insurance that covers losses from the first dollar may also not meet a company’s needs. If based on prior loss records a business has $5,000 in losses each year, it is reasonable to assume that the insurer will build that cost – plus overhead and profit margin – into the premium. This leaves the customer who elects to have no deductible in the position of trading dollars with the insurance company - and doing so at a loss. Working closely with an educated agent or broker to talk through all the options may help your company choose the right deductible that targets any unexpected risks.
3. Liability Limits
Determining the right liability limits is a complex decision that should involve a company’s lawyers, accountants and possibly even the owner’s estate planner. Several factors are in play, including what kind of losses a business may be exposed to, how high an award a jury might grant in the event of a loss, what type of legal entity the company is, and what assets need to be protected. In today’s litigious society, with ever-increasing jury awards and rising defense costs, having inadequate liability limits can spell the end of a going concern. Finding the right liability limit is, therefore, an important element of managing risk.
4. Coverage Terms
Both commercial and personal insurance are highly regulated businesses that frequently allow for "apples-to-apples" comparisons when customers go shopping for policies. However, the ocean marine insurance industry is different. Two policies may look very similar, but in fact contain significant coverage differences. These differences could leave the unwary business owner without the coverage he thought he had.
By working with an experienced agent, a company can better understand the different coverages offered by a variety of insurers and make an informed choice that is right for the company’s level of risk and types of exposure.
One good strategy is to go with an insurer that has a long track record in ocean marine. Think about it as the difference between a specialist and a generalist. Insurers that continuously serve the maritime industry likely have a higher incentive to provide good service. Similarly, a carrier that specializes in ocean marine is more likely to provide a range of viable policy options for each unique maritime risk.
Two Additional Strategies
To keep premiums as low as possible, companies can use two other strategies to reduce risk. The first is to shift risk whenever possible to other parties through contractual agreements. For example, a contract with a vendor doing work on a pier whose negligence may cause a fire or other damage should include language that places responsibility firmly on the vendor. Requiring the vendor to show proof of insurance that adequately covers both your company’s liability and its own liability before work begins is an added safeguard that should not be overlooked.
The second strategy is to put solid risk control measures in place. These controls may range from having standardized hiring, orientation and safety training procedures in place to reduce the chance of human error, to making sure that equipment is well maintained to reduce accidents and business interruptions. Insurers often consider these types of risk control practices when assessing risk and pricing a policy. Adequate risk control measures may help lower a company’s loss record, which may in turn reduce its premiums over time.
An Annual Chore
As 2012 gets underway, it is the right time to review many things about how your business operates. Assessing your insurance needs and making sensible adjustments to your coverage should be an important annual ritual. Guided by the list above and with the help of your insurance agent and carrier, you may find better ways to strengthen your coverage and control your risks at an affordable cost.
(Reprinted from the March 2012 edition of Maritime Reporter & Engineering News - www.marinelink.com)