Rate Raise Shows Need for Risk Management

Get ready to pay more for your business insurance and maybe to find a new insurer, whether you want to or not. For that matter, get ready to make nice with your insurance broker, as you may need help getting through the months ahead.

Why? Because for the first time in more than a decade, insurance premiums are going up. If you own a small or mid-size business, this means you may pay higher premiums for your business insurance in the coming months. And you may find yourself shopping for a new carrier if yours decides it doesn’t want your business anymore.

In plain English, the first hard market for insurance in many a moon is upon us, or will be soon, and it will change the way you think about risk.

For more than a decade, insurance companies sold ordinary commercial coverage at premiums that didn’t come close to reflecting the risks they assume. Worldwide, a sea of capital--$100 billion, by one count, though no one really knows--chased risk in the insurance marketplace, driving prices downward. Insurers lost money on their core business, although they posted profits overall by raking in big gains on their investment portfolios.

The result: Business bought insurance coverage for a song, by and large, and it got a little sloppy about managing risk.

Now insurers think they have the advantage. They hiked premiums for workers’ comp insurance and some liability risks about a year ago; more recently, some increased premiums for many common risks, even for businesses with sparkling-clean claims records. A few are now wiping out whole lines of business, leaving irritated policyholders with the task of hunting for a new carrier.

If you are one such policyholder, you may need help finding another carrier--and good help may be hard to find. As the insurance market softened, carriers squeezed costs out of their distribution systems by reducing commissions paid to agents and brokers, forcing many a seasoned professional to take up another line of work and pressuring those still in the business to sell, sell, sell just to stay afloat.

You may harbor little sympathy for insurance people who, like many commissioned salespeople, tend to come and go. But it pays to do business with an experienced broker, especially in times like these.

Why? Until your business reaches a certain size, you probably can’t afford to add professional risk management to your executive team. That leaves you, or perhaps your chief financial officer, to do the job. Do you have the time to identify and analyze the risks created by your business operations, among them the risks created by changes in your operations--for example, new production techniques, or new distribution channels? Does your CFO? Do you have the expertise? Do you have the time to shop those risks in the insurance marketplace?

Probably not--on all counts. Risk management is a profession for good reason: Every business creates risk in every phase of its operations, and you can’t identify and analyze those risks without expertise far beyond that of even the most attentive business owner or CFO.

One solution is to find a professional with solid experience in insuring businesses like yours. Another is to contract with a freelance consulting risk manager with solid credentials in your industry. (For leads, check with your peers in the business community, even with your competitors; also, query your trade association and professionals with whom you do business--your accountant, lawyer, etc.)

Be prepared to pay for the expertise you need, either through commissions or perhaps fees. You want your insurance broker or consulting risk manager to study your operations from one end to the other to uncover and manage the actual risks your operations create, and you get that service only by paying for it.

In the end you may manage your risk by buying insurance--that is, by transferring the risk to an insurance company in exchange for a premium. You may also find ways to limit the risk without insurance--for example, by changing your production processes to eliminate conditions hazardous to your employees or to third parties.

Whatever your choices, managing risk becomes increasingly important in a hard market for insurance coverage for two reasons: To the extent that you manage your risks, you limit your need for insurance--and you make yourself less dependent on the mercy of an insurance carrier bent on limiting its own risk by canceling your coverage altogether.

Juan Hovey can be reached at (805) 492-7909 or at [email protected].