April 2004 | Commentary | Risks and Rewards

8 Steps to Lower Insurance Premiums

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Q: I have experienced big increases in my insurance premiums. Why has this happened and what can I do about it?

A: Like all commodities, insurance is subject to the laws of supply and demand. Its cost is determined by the amount of capacity available in the world's markets.

In the 1990s the world experienced a soft insurance market because capacity was readily available. Attracted by impressive gains in the equity markets, insurers competed heavily for any risks they could insure. This put pressure on them to offer broader coverage and lower their premiums.

But as a consequence, the premiums they charged were insufficient to pay claims. This resulted in loss ratios that exceeded acceptable levels by a wide margin.

When the events of Sept. 11 took place, the insurance market suffered a serious drain in reserves. This made reinsurance costs—the cost of insurance that insurers themselves obtain—more expensive.

The result was the departure of insurance companies from the market, an increase in premiums, and a restriction in the coverage available.

Cost-cutting strategies have ranged from scouring the world's markets, to pooling risks, to establishing captives. Each has its own advantages and disadvantages.

Captives can be a viable solution, but they can be costly to set up and manage. Risk pools allow operators to purchase insurance at a volume discount, but the claims of the entire group are typically considered together. This arrangement works as long as all the pool members maintain the same relative loss records.

Don't confuse risk pools with mutual insurance associations, or Clubs. These associations have worked very successfully on a global scale. Because of their global nature, the spread of risk for these associations is far greater than an informal group. They are non-profit entities, and all their premiums after expenses are used to pay claims. This provides stability of premiums because they are less subject to market swings.

As an individual insurance buyer you can take a number of simple steps to reduce your premium burden. These include:

  1. Find a specialist broker who understands your industry and your operation. He is in the best position to find an insurer most suited to you.
  2. Conduct a thorough review of your current insurance program. Pay special attention to the scope of the cover and how applicable it is to your operation. Make a note of all the policy exclusions.
  3. Undertake a complete assessment of your operation. Keep in mind questions such as: What makes you a better risk than other operators looking for the same insurance cover? Record the positive attributes of your operation.
  4. Find an insurer who knows your field well. The size of the insurance company is not as important as its specialty. Be certain that your insurer provides a cover that is specifically tailored to your operation.
  5. Establish a risk management program. There is a direct correlation between your premiums and the scope of your cover. Factors such as your limit of liability and deductible affect the cost of your insurance. Decide carefully the amount and risk you are willing to retain, the amount you wish to insure, and the risks that others will assume.
  6. Establish a loss prevention program. Assess your vulnerabilities and take specific steps to address them. Document corrective measures when an incident takes place.
  7. Establish a relationship with your underwriter. Get to know him personally and let him know your operation intimately. Your goal is to make him feel comfortable in insuring your operation.
  8. Package as much as you can with one insurer. This can give you the benefit of a "package discount." You should also consider purchasing a multi-year policy. Insurers will often give a discount if they write a policy for more than one year.

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