The US Department of Labor estimates that forty percent (40%) of businesses never reopen after experiencing a disaster. Twenty five percent (25%) of surviving businesses will lose their market and shut down within two (2) years of a misfortune.
According to a report of nearly 400 CFO’s and Treasurer’s of some of the world’s major corporations by leading institutions found that 85 percent of the respondents indicated that they review risk management as an investment.
Outnumbered and Outspent
When it comes to understanding the insurance industry consumers have few options and resources available to them when looking for assistance or guidance, meanwhile insurance companies have an army of resources. Brokers and agents are the sales force of the insurance companies.
Most state regulatory employees are plucked from within the insurance industry and once that job is over they typically go back to the sell side of insurance thus it is a very closed industry group.
There are no real consumer perspectives to balance out the many industry voices pushing for the industry policies. The only real advocate a corporation has is one that is Independent and represents only their interest.
"An error doesn't become a mistake until you refuse to correct it." – Orlando Battista
The Mistakes of Going at It Alone
1. Not Performing a Risk Assessment – The biggest assumption CFO’s make is that the current insurance program is set up properly. The real problem is that an assessment has not been performed to evaluate what are the true risks and exposures of the company business operations. Often they focus on the premium not the coverage. Without knowing what the true risk and exposures are you can’t intelligently purchase the property insurance. Thus, the insurance program is flawed from the start. Sorry to say, but this error is discovered when an underinsured or uncovered loss occurs. In the haste to sell products coverage issues and exclusionary language contained in policies are often missed by brokers.
Beyond the insurance product often overlooked is the risk transfer mechanism during contract review. Many organizations rely on their lawyers to advise in this area … the problem is lawyers tend to use boilerplate language or do not fully appreciate the insurance language as it relates
to the operations and associated liabilities.
The CFO acting as the risk manager and not being an expert in insurance can miss these finer points as well.
2. Not Reviewing Insurance Coverage in Detail – insurance policies are contracts. Insurance companies and their claims adjusters know the significance of every word in the contract and it is important for you to know how the policy will respond to a claim. You have an expectation that a loss is covered. Unfortunately, exclusions are not discovered until a loss occurred.
Coverage gaps, underinsured and even over-insured issues exist … the policies
were not reviewed properly or with an eye toward recovery. CFO’s need to validate their insurance; if the policy is not written correctly from the start then you are just wasting money … it will not respond the way you assumed it would. Remember the statistic.
3. Not Focusing on Safety Programs and the Big Picture – Many companies use the purchase of insurance as the only approach to their formal risk management program... Big Mistake… not paying attention to safety and loss control is where many companies miss the boat in terms of the ultimate savings. CFO’s are caught up in too many details of their daily business to pay close attention ... sometimes this responsibility is given internally but the real problem is that they do not have an eye for the bigger picture.
More time and devotion should be focused on a sound pro-active safety and loss control program for the long term cost savings to be realized. Safety and loss control programs should be instituted with the big picture in mind which is geared toward the protection of company assets and human capital.
4. Competitively Market the Insurance Program in a Professional Fashion. CFO’s explain to us that their brokers solicit quotes from multiple insurance carriers, they market the insurance program by bringing in a few brokers, or they are just simply happy with their broker.
We know that not all brokers can deliver the same price and product thus to get the best results from a marketing effort it must be managed and controlled properly. Remember that a Brokerage is a business just like you … motivated by profits.
In the property and casualty world only one broker can work with a particular insurance company ... all brokers do not represent the same carriers or even all of the carriers … some brokers say they can deal with all the carriers … but in reality they do not.
Typically a substantial amount of money is “left on the table” and the best bottom line results are not achieved.
5. The Right Insurance Broker – a False Truth. The insurance business is about relationships and we tend to do business with people we like and trust though organizations place too much faith in one broker. In an insurance brokerage relationship CFO’s place their trust and guidance in the hands of an insurance broker who becomes their sole source of information. We should also understand that brokers are the marketing arm of the insurance industry.
The Brokerage service is vital but like other business dealings organizations should perform a due diligence study on the broker you are going to do business with … the carriers they represent … their ability to provide needed services. Ultimately organizations should receive Stewardship Reports that outline standards of excellence that a broker will adhere to when servicing your account.
We’ve seen clients who have had the same broker for many years only to find out that they (the client) were paying the highest insurance rates for many years while still not having the right coverage.
The insurance brokerage income is based on sales commissions, fees and contingent commission all based on a contractual relationship with an insurance carrier. There are great insurance brokers out there … but the services provided are geared toward the sale.
Has a broker ever given you advice at the same time telling you to buy from a different Broker?
5.5 Lack of Negotiation in the procurement process. There is a misconception that the insurance product is standard and an even greater erroneous belief that prices are somewhat fixed.
This is simply not the case … insurance coverage and premium is negotiable and by utilizing a professional competitive marketing effort managed by an independent advisor not only can coverage be enhanced but premium 9 times out of 10 are reduced.
CFO’s should consider the following questions:
1. How do you view Risk Management … an Expense or an Investment?
2. Can you internally duplicate long term industry knowledge and expertise?
3. Understanding of the business model of both broker and insurance carrier to ascertain certainty that the Best Price and Coverage was achieved.
4. What is your company’s risk appetite? If might be larger than you want.
5. Corporate Governance & Duty of Care … What is you comfort level in this area?
With the CFO wearing so many hats and because of resource constraints priority is given to top initiatives, abandoning many other meaningful savings programs, including insurance opportunities that could lead to significant cash savings. However, these opportunities can be captured - an Independent Advisory can bring greater transparency and deal experience to the process.
Advisors have developed strategies and solutions to ensure risks are mitigated, major problems are avoided, time is managed, and cost reduction is a priority.
How we get Started