One of the most valuable resources a company should have is a good insurance broker. Too often companies view a broker as a “vendor” of insurance and fail to realize the full potential for which they are paying a lot of money. There are two reasons this happens:
For example, when selecting an accounting or law firm, a company does not often award a contract to the firm that can provide the cheapest cost of service. Several other qualifications are usually taken into consideration:
The list of qualifying factors goes on and on. At the end of the process, a determination is made as to whether or not they can afford retaining the firm that is the best fit – not necessarily the lowest cost option.
Where to start? To begin with, a professional risk management firm will want to evaluate all the risks that have an exposure to loss. The methodology employed for making this determination is crucial to differentiating between a risk management “manager” and a “peddler”. How does your broker compare?
Those risks are then compared with the current insurance coverage. Is insurance provided for exposure that no longer exists? Has the value of the assets changed resulting in too much insurance? And is there an exposure to loss present for which there is no insurance?
Continuing to have insurance coverage for an exposure that no longer exists means the company is spending money unnecessarily. This can result in an opportunity for some immediate savings. Maybe the assets of the company have changed over the years and the total value of the assets is no longer accurate for insurance purposes resulting in having too much insurance. Rightsizing the insurance to the assets can also yield some immediate savings. Finally, not having insurance where there is an exposure for loss present is not necessarily a bad thing - it is where all good risk management starts.
When addressing any risk there are three treatments that should be examined prior to contracting for insurance. By examining each, a company can determine the right “safety net” of insurance and maintain the balance of business and risk.
Can the loss be avoided?
Safety equipment and training programs, maintenance programs and hiring and firing practices are all about avoiding risk. Money spent preventing losses from occurring are always a good investment.
Can the company retain the risk themselves?
In other words, take the chance. The most common form of risk retention is the deductible. For every loss, the company agrees to take a certain dollar amount of the risk. However, most companies do not select the deductible in the proper manner. The decision is usually based on how much is saved in premiums. There are four factors every company should be considering when reviewing deductibles:
Can the company transfer the risk?
In every contract a company engages is the attempt by both parties to transfer risk to the other party. For example, this is typically done through indemnification, hold harmless clauses, waivers and insurance clauses. All contracts should be reviewed to minimize the risk being retained by the company. If the risk cannot be avoided or transferred, then you need insurance for it.
Fritz Koehler is the Executive Vice President of Sales for Insurance Alliance of Houston, Texas. Mr. Koehler has been published in The Houston Business Journal and American Agent and Broker. In addition, Mr. Koehler conducts continuing education credit seminars for Certified Public Accountants, is an annual speaker at the Texas Association of CPA's meeting and has addressed the Texas Bar Association on the matters of business insurance. Mr. Koehler can be reached at 713 966-1704 or email@example.com.