3 creative ways to minimize your clients’ losses

These include establishing “buffer” pools of capital; forming captives that join well-performing groups in spotty risk classes; and contracting engineering teams to work with corporate health and safety committees to do some crisis management and emergency planning. 

 

Despite a relatively quiet year in terms of major catastrophe losses in Canada’s commercial property and casualty lines in 2012, insurance underwriters are keeping a close watch over their accounts. The country’s somewhat sluggish economy, featuring ongoing low interest rates and poor investment returns, leave insurance underwriters little margin for error when it comes to pricing risks.

 

And while generally the market for commercial property and casualty insurance has been stable, results have been a mixed bag across various business segments. Marsh, for example, cites difficult conditions in specific classes of business, including saw mills, oil sands and refining, and pipeline risks. Taxis and trucking fleets have also had their issues, historically. 

 

So with an ongoing focus on bottom-line underwriting, what are commercial brokers in Canada doing to keep their clients’ loss ratios under control and their premiums down? 

 

One idea is to create a kind of “buffer zone,” or a funding pool. 

 

This pool covers a business group’s day-to-day claims up to a certain level, at which point the insurance company coverage kicks in to cover the larger catastrophe-level claims. This kind of scenario would be for associations or groups of businesses, as opposed to a single broker client.

 

For example, say a group or association of businesses – a fleet of trucks, for example – pays a $20,000 deductible. Beyond that deductible, a broker might then help the client create a fund that essentially “self-insures” or pays all day-to-day claims up to the fund’s maximum limit (let’s say $100,000). Once this limit has been reached, then an insurance company would provide insurance coverage for catastrophic claims that exceed the $100,000 fund.

 

This strategy is geared towards a smaller group of clients. Larger commercial clients, for example, might be able to afford to pay a larger deductible. The fund operates under the same principle as an increased deductible:  the client is self-funding risks instead of transferring them to the insurer, allowing the insurer to offer a lower premium. The client meanwhile, works with the broker to implement forms of loss control.

 

Brokers are using another time-honoured strategy, captive formation, to benefit certain groups or associations. 

 

Companies form captive insurance companies as a way to self-insure their own risks and focus on loss control measures. Since these risks are transferred away from their insurers, insurance premium costs are lower. Captive formation is often associated with hard markets, when premium rates are typically higher and coverage is difficult to find.

 

“Even if you are a good operator, you don’t necessarily get the advantage of being a good operator because the industry can be tainted – like bus operators, for example,” one broker says. “You could have a bus operator who rarely has claims but, if you have limited market capacity and availability, those clients are at the mercy of the insurance company.”

 

Captives are a way for brokers’ clients to take more control of their insurance costs and take them out of the fluctuations in the marketplace.

 

As for controlling insurance costs, large and even mid-sized commercial brokers are seeking to strengthen their client relationships by offering risk management and loss control advice. 

 

Nowadays, holistic loss control initiatives have gone beyond a narrow analysis of physical operations. Instead of engineers going to a company to provide advice on how many sprinklers to use and where to place them, for example, brokers are contracting engineers to work with a client’s health and safety committees in an effort to come up with emergency planning measures. 

 

These teams will sort out, for example, what might happen when people are trapped in the building; when roads are closed due to inclement weather; how to protect children in schools during a disaster; evacuation procedures, etc. 

 

Even smaller brokerages can contract out teams of engineers for the same purpose. This kind of holistic loss control and risk management advice goes beyond the traditional broker role of simply providing a renewal notice, a quote on insurance, and a promise to pay claims when they happen. 

 

“I think it’s something we are doing to make ourselves more consultative instead of just transactional,” as one broker put it.

 

“You want them to think of you first, and be able to think: ‘Remember that time when the plant had to shut down, and they were there with us, and we didn’t lose all of our customers because of that plan they helped us build? There are a lot cases where companies have benefited from that crisis management help before an event ever occurred.”