Tag Archives: Chuck Coppage

Shouldn’t Your Insurance Coverage Become More Than An Expense?

Most businesses buy their insurance coverage and while it may seem expensive they are content knowing that unforeseen circumstances driven by an unforeseeable event won’t financially devastate their company. What if there was a way to shift this traditional model?

I think there are a great many of us who have had the thought that if my premiums aren’t used to pay losses for my business why shouldn’t I get some of that money back? After all, why should the insurance company make a windfall profit because I do a great job of risk management and preventing losses before they happen?

The purpose of this article is to tell you that there is a way to recoup part of your premiums, while still getting competitive premiums. Insurance is a financial transaction as well as a way to purchase protection for your business. Most of us are familiar with the basics of paying premiums, checking to be sure we have adequate limits of insurance and can tolerate the cost of a claim under our selected deductible. At the same time, we aren’t nearly as familiar with the way our premiums are used by the policy issuing Insurance Carrier.

Insurance Carriers use a pooling system to provide protection to policy holders and at the same time maintain adequate financial reserves sufficient to pay claims individually or in the event of a catastrophe. By pooling premiums Insurance Carriers need to write a mix of accounts, both low hazard as well as higher hazard. In addition, the pool needs a balance of profitable and unprofitable accounts, which creates a subsidy for the unprofitable accounts, but enough premiums in the aggregate to pay all claims.

The ultimate goal of the Insurance Carrier is to break even or maybe make a small profit when considering a traditional balance sheet review of their business revenues versus expenses. Unlike many other businesses, the Insurance carrier has a second and more rewarding way to generate profits from the insurance transaction. This additional source of profits is carried on their balance sheets as both assets and restricted assets in the liability column.

A simple example of how this works is easily seen in life insurance. The Insurance Carrier can issue a policy with a 1 million dollar benefit and pay that amount the next day in worst case situations. Obviously, the carrier didn’t collect the full premium nor will they on that policy. The assets held on the balance sheet as restricted assets are used to pay this loss. The same dynamics work with the same characteristics in business insurance. The principal lines of business coverage are workers’ compensation, auto liability, general liability and health insurance.

The existence of restricted assets on the insurance carrier’s balance sheet is also the source of investment income. These assets in commercial insurance are primarily reserve dollars set aside after the occurrence of a claim that are not yet paid. In addition, the carriers set aside reserves allocated for claims, but not yet allocated to a specific claim. Over a period of years these restricted assets can grow to be several times the annual premium written by the Insurance Carrier.

Restricted Assets are invested in secure non-equity investments such as bonds until needed to make claims payments. In many instances, the insurance carrier can generate investment income in the range of 5-50% of annual premium income. This allows insurance carriers to cover unexpected losses and have capital available for growth of their policy count with new business.

Business owners need to know that there are programs and insurance coverage methods that will allow them to take advantage of these income streams for their own benefit. Insurance carriers, while accustomed to taking risk when writing insurance policies, are very comfortable giving up the income potential in return for policyholders taking a portion of that risk. Working for only fee income allows insurance carriers to increase income while limiting risk. At the same time, moving to a program with an alternative structure is a good option for a business. It allows a business to reduce insurance cost through recapture of premiums as dividends. It is a “win-win” situation for everybody and allows a business to build an asset while continuing to protect their business against catastrophic losses.

A careful feasibility study can be completed that will quantify the risk/reward equation for a business owner. Completion of the feasibility study will allow a business to make an informed decision as to whether taking a defined risk is adequately rewarded with reduced cost and dividends, over time.

 

In addition to building assets on your balance sheet with an alternative approach to insuring risk, you can also gain better oversight of your insurance costs and claims management. Every company of average size should consider having a feasibility study completed. If you are interested in having such a study completed for your company, feel free to contact me.

Do Natural Disasters Matter To Me As An Insurance Buyer?

Does the recent string of catastrophes from New Zealand to Mid America to Japan matter to me and my Insurance Program? Should I worry about the impact and record breaking cost of these events? Currently the cost estimate is over 60 Billion dollars and counting. As with so many things in a global environment, are all of these events related and will they have serious implications for insurance pricing in the future?

The simple answer? Yes, they do. Insurance at its core is the ability to collect premiums from many businesses such as your local operation and many thousands of other small to medium size businesses and use those premiums to pay losses for the group. The insurance carrier has to charge a premium that not only is sufficient to pay smaller routine losses, but to also bank premiums for the large multi-billion dollar losses that can occur on an infrequent basis. Every carrier has to predict the potential loss that they could be exposed to from any source and make sure they have the financial strength to pay those claims. No one carrier, no matter how large, is able to take 100% of any loss or losses that might happen without facing financial insolvency. The solution to that problem is to purchase what is called reinsurance. In essence, each carrier pays a premium to another carrier for protection against a truly devastating event such as happened in Japan.

A carrier might have multiple layers of reinsurance with each policy taking a defined portion of any loss such as 5 million of coverage after the paid loss totals 15 million, and these policies each have a defined portion of a loss for a defined premium. These reinsurance premiums are then included in the premium that each policy holder pays each year. Reinsurance premiums can average as much as 15 to 20% of the annual premium you pay as a business owner. If the reinsurance carriers have to participate in the cost of a catastrophe such as Japan or New Zealand for earthquakes or hurricanes or tornadoes, then the premium they charge will increase which will increase the premiums your carrier pays for the protection and thus your individual premiums can go up. It is this ability to spread high dollar losses to numerous carriers that makes insurance work in any situation.

The reinsurance industry is absorbing losses at a record pace over the last six months, but through careful management of assets and surplus has been able to remain solvent and financially able to continue to provide protection. We are starting to see an indication that rates are going to adjust upward to replenish surplus for reinsurance carriers. Increases will be variable based on location, line of business and carrier concentration. The industry is keeping a wary eye on the upcoming hurricane season. If a large event takes place in the United States in a heavily populated area, it could be the final event that generates a rapid increase in pricing at the individual policy level. Stay tuned for further developments.