Correct Coverage for Your Firm More Important Than Price

The insurance industry has good news and bad news for business owners this year. What’s more, the good news is the bad news, and if you understand why, you can help yourself get the right insurance for your business.

The news, good and bad, is that:

* The pricing war among property/casualty insurers continues apace, more than a decade after it began; so

* You may well pay less for your insurance this year than you did last year; and

* If you buy packaged, cookie-cutter business insurance, you may also get broader coverage; and

* Sooner or later, that spells trouble for many business owners.

How? What’s not to like about spending less and getting more?

Business owners need a healthy insurance industry to shoulder some of their risks, and by a key measure--what insurers call combined ratio--the industry is anything but healthy.

The combined ratio measures how much money an insurer pays out in claims over how much it collects in premiums. In the best of all worlds, an insurer would pay out, say, 94 cents in claims for every $1 it collects in premiums, with the difference covering expenses and profit. Such an insurer would show a combined ratio of .94, and an economist would say that the insurer made a profit on its underwriting.

But claims have exceeded premiums for property/casualty insurers since 1979--two decades. Insurers have survived and even prospered in that time by making money on their investments, but as a whole they have made no money on underwriting. They didn’t last year, and they likely won’t this year, either.

It’s a bad sign; Wall Street often ignores it but you should not. You want your insurer to make money the old-fashioned way--on its underwriting--because that means your insurer understands your risk and prices your coverage accordingly. In the alternative, if your insurer just pants after your premium dollar, it may or may not understand your risk and, in any case, if its investments tank, it may limit the risk of loss to claims from you by whipsawing your premiums or canceling your coverage.

In plain English, price isn’t everything when it comes to insurance.

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What to do?

The first step is to understand the cost of the insurance price war--namely that agents who chase new business can’t spend much time with their clients. Insurers understand this perfectly well. Indeed, they broaden their coverages because agents can’t serve their clients, tossing more and more coverage into their cookie-cutter business packages in the hope that they can make good service immaterial.

The truth is that cookie-cutter insurance cannot cover everything under the sun, and that good service from your insurance agent is important. Indeed, as your business grows and prospers, your risks become more, not less, complex, making good service essential from an agent who understands your operations.

The second step is to understand that no matter how fierce the competition for your premium dollar, if you resist the temptation to treat insurance as a commodity--and your agent as a mere order-taker--you help yourself, your agent and your insurer.

Indeed, everybody benefits when you focus on the proper objective--getting good insurance for your business at a fair price. You sleep at night, and your agent and your insurer make money because they understand your risk, not because they got you to open your wallet.

“You can’t get good advice from your agent if everybody’s chasing premiums,” says Art Newman, a broker with the insurance agency C.M. Meiers Co. in Encino.

“The premium is an important issue, but it’s not as important as getting the right insurance for your business. The agent has to understand your business first--how you make product and distribute it and sell it. Otherwise, you won’t get the right coverage.”

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Given the competitive pressures businesses face, everybody wants to save money, Newman says. But you need insurance coverage broad enough and deep enough to cover your real risks, and that takes time and thought.

“You have to find out whether the agent who wants your business understands your industry and has access to the right insurance companies,” Newman says. “You also want to know who will service your account, and what service you can expect.

“And you have to give your agent the time to find out what you really need. Too many agents--and too many business owners--only talk about premium, and it’s only half the issue. If you cut your premium in half and get half the coverage you need, what do you have?”

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or via e-mail at [email protected].