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Become A Better Buyer To Reduce Insurance Costs

By Harmon Wasserman, CPCU, and Alan P. Schreibman, ARM

The annual cost of insurance is usually larger than the combined amounts businesses spend for accountants, attorneys and doctors. Yet most people only develop an elementary knowledge of insurance because it’s not a subject that appeals to them. However, with just a little knowledge of how the marketplace works, you can become a better buyer and potentially save your company thousands of dollars in insurance premiums.

For many companies, insurance is the most expensive line item after payroll and raw materials and a wrong decision can damage the company’s bottom line. Most business people would never sign a contract without an attorney, purchase a piece of capital equipment without consulting their CPA or construct a building without an architect. But these same logical people will buy and administer insurance without having any insurance education. Most of the time, they rely on their agent or broker, or out of mistrust do it alone.

To be an effective insurance buyer, you don’t need to be a coverage expert. However, you do need to understand the insurance market and how it works. This begins with an understanding of the factors that affect the cost you pay for insurance and what you can do about them to help yourself.

Variables That Affect The Price Quotations You Receive

There are factors or variables that affect the cost of insurance, many of which have no relationship to the nature of your particular business. These variables typically fall into three categories: human variables, systemic variables and conflicts of interest.

Human Variables

Human variables are those related to who is working on your account. The insurance company underwriter can be experienced or a novice. He or she may have a large workload when your application arrives and therefore not welcome something that adds to their burden, or they may have ample time to work on your account. They may have personal problems.

From a technical standpoint, underwriters are given a wide range of permitted debits and credits to apply to the base price for each coverage. Depending on their recent successes or failures on similar business they can be aggressive with credits, which is good for you, or conservative, which is not good for you. In some cases, they may even decide to apply surcharges to the price.

Systemic Variables

Systemic variables affect the general pricing process for virtually all insurance companies. These factors include:

• The insurer’s basic rate schedule for each coverage quoted. These rates can vary by insurer.
• The cost of reinsurance. Reinsurance is the insurance that insurance companies buy to limit their out-of-pocket losses.
• The stock market. In the past, insurers could offset underwriting losses with investment income. This is not so much the case today.
• Whether your company is perceived by the underwriter as being a good or a poor risk. Obviously, “good” risks get better rates than “poor” risks.

Other systemic variables that come into play when you are seeking a quote from a particular insurer are market blocking, the carrier’s position on profits versus market share, their target classes of business, and the staffing level of the insurance company.

Market Blocking: If you are having several brokers quote your account, chances are that more than one broker will seek a quote from the same insurance company. Most insurers will only provide a quote for the first broker that comes in the door with an application. This effectively “blocks” the other brokers from working with that insurer.

Profit vs. Market Share: All insurance companies want to make a profit, but if they are more concerned with losing their customer base than with accepting an account that is perceived to be unprofitable, they will take their chances and offer a lower price.

Target Classes of Business: Different insurers prefer different industry classes of business. For example, some insurers prefer to write manufacturing companies or property developers while others may prefer construction or transportation risks. The classes of risk the insurer prefers generally get better rates.

Staffing: If the insurer’s underwriting department is understaffed, it may not be able to give proper attention to your application and you may not get the best possible quote. If there are things about your company that should get you a better price, you want to make sure the underwriter has the time to consider them.

Conflicts of Interest

A broker’s loss ratio, business volume, account retention, growth percentage and “hit ratio” all affect the quote that insurance companies will offer on your account. Insurance companies give special treatment and prices to agents or brokers with good report cards. Naturally, insurers would rather deal with agents and brokers who give them a steady flow of profitable business and renew a high percentage of their accounts than those who waste their time. If the person who was first in the door with an application does not compare favorably with others who were blocked out, it will be to your detriment.

Also, agents or brokers sometimes have access to an insurer’s exclusive program that is specifically tailored (coverage and price-wise) for a particular industry class. If the program were available to you, how would you know about it unless you were working with a broker that worked with the program? Would someone who does not have access to the program tell you about it?

Conclusion

The eventual outcome of the insurance buying and pricing process is affected by many factors. To get the best deal, you have to at least have a rudimentary working knowledge of the insurance market and the variables that affect pricing. If you don’t have the time or inclination to learn how to deal with these variables yourself, or want objective third-party assistance, there are insurance advocates and risk management consultants who can help you. By availing yourself of this knowledge, you too can become a better insurance buyer! 

ABOUT THE AUTHORS

Harmon Wasserman, CPCU is a former insurance broker and current buyer’s insurance advocate with Harmon Insurance Services in Newport Beach, CA. He can be reached at 800-258-3818 or by e-mail at harmonwass@aol.com.

Alan P. Schreibman, ARM is an associate consultant with Warren, McVeigh & Griffin, Inc. in Newport Beach, CA. He can be reached at 310-559-7032 or by e-mail at integratedrisk@comcast.net.

riskVue | The webzine for risk management professionals
July 2003