Tell Insurance Rate Hikes To Take a Hike
For a CFO or Risk Manager in a middle-market company, there aren’t many things worse than turning in a no loss year on your insurance policies, only to be met by significant rate hikes in the coming year. WTF – Why The Face?
So, what’s a CFO or Risk Manager to do? Well, here are a few approaches that may mitigate the impact of rate increases:
Higher Deductible
A business can opt for a higher deductible in its insurance policies with the goal of offsetting rate increases. This approach makes sense when a business has a good loss history. A higher deductible is often a risk worth taking.
Lower Policy Limits
Sometimes, a business may be over-insured, and it may be possible to lower policy limits. This may particularly be the case for businesses that have paid off mortgages on the property or for businesses that are asset-protected.
Retro Policy
A retro policy enables a business to participate in its risk management on a sliding scale, and this can be better than a guaranteed cost policy for businesses that have a good loss history. If claims are low, insurance costs come down. However, this type of policy has a predictable downside. If claims are high, insurance policy costs go up in the year the claim occurs.
Negotiate
There is no rule that says a business has to settle for a rate increase. A CFO or Risk Manager can push back on their broker and demand policy pricing that is in line with their loss history. The broker may be able to approach other carriers or develop a creative solution that rewards the business for a good track record.
Captive Insurance
Businesses can choose to own their own insurance company, known as a captive insurance company. A captive can insure all or part of a company’s risk, and in years with low or no losses, the business is able to keep the underwriting profits in the captive. Captives usually transfer a portion of their risk to a re-insurer to avoid catastrophic losses. Captives can help offset insurance rate increases and smooth future rate increases.
Revise Your Business Model
Another approach CFOs or Risk Managers can take to mitigate the impact of insurance rate hikes is to modify their business model to push high priced insurance off to a third party. As an example, consider a successful retailer that provides delivery service, owns its delivery fleet and hires its own drivers. Auto liability insurance costs may be rising, even if the company has experienced low losses. By outsourcing its fleet and drivers to a larger trucking operation, the business may be able to lower its total cost for delivery. And, since the trucking company taking over delivery is larger, it may be able to secure significantly lower auto insurance costs in the commercial market or in a risk retention group (RRG). There are scale benefits in purchasing insurance, and bigger is often better.
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Conclusion
Rate hikes can be super frustrating, particularly when your business has kept losses in check. The good news is that there are a wide array of options to mitigate insurance rate hikes, and many of them give greater control to CFOs or Risk Managers.