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Stalking insurance savings.

Careful analysis of coverage, risk and company practices can control insurance costs.

Karl Forsyth, owner of dB Music Inc. of Anchorage, says he comes from a musical family, but learned about operating a music-related business the hard way. That goes double for learning to manage his business insurance.

Forsyth's store has been selling musical instruments and sundries for 15 years. Until a couple of years ago, the store averaged two to four break-ins a year, so-called "smash-and-grab" incidents, with broken glass and alarms sounding.

"I was tearing my hair out," Forsyth remembers. "There were several times when I didn't submit claims because I saw what it was doing to my rates."

But with stolen items averaging $700 to $1,000 each, Forsyth couldn't afford not to file. To make matters worse, his policy didn't cover the inevitably broken glass.

His alarm system? "It always worked great; the police were usually there within two minutes. But a smash-and-grab is very easy to accomplish, even with the best alarm system, because they're out of there in 30 seconds," Forsyth explains.

Finally, the store was hit four times in one month, and his insurance company canceled the store's coverage. Forsyth installed bars on the windows and obtained new coverage from another broker. Noting the price of premiums significantly affects his profit margin, Forsyth says insurance is his third highest cost of doing business, after payroll and rent, and ahead of advertising, depreciation and operating supplies.

Aspects of Forsyth's story are played out in large and small businesses all over the state. For many business owners and managers, the world of insurance seems complex and full of unintelligible jargon. It is common, especially for small proprietors who can't afford trained insurance staff, to feel that they are at the mercy of agents and brokers.

Reinforcing that belief is the reality that insurance products constantly change and premiums rise. All this leads to a sense on the part of many business people that they have little or no effective control over their insurance strategies and costs.

Smart Shopping. The apparent complexity of insurance buying derives largely from market factors that do indeed change rapidly and often for reasons for from the doorstep of any one business. Rising premiums are no figment of the business person's imagination, especially in the area of workers' compensation. According to brokers, the cost of premiums in Alaska for many types of insurance needed by businesses is expected to continue to increase.

Fortunately, managers can adopt strategies to provide businesses with the cost-effective insurance they really need. The first step is to understand how insurance policies are written.

Every business is exposed to some risk of damage or losses to its income or assets from various causes. Insurance companies assess the risk of a given business by examining the history of losses experienced by similar businesses, as well as by the individual firm seeking protection. This provides the basis for calculating how much of the cumulative risk insurance carriers are willing to assume. Insurance carriers collect premiums from many companies to finance the coverage of losses that are actually incurred by relatively few, thereby spreading the risk and reducing the exposure of each individual client.

Most businesses need to consider three types of insurance. Property insurance, for real or personal property, includes the coverage typically associated with flood, fire and other calamities. Property insurance protects the business from losses to buildings, inventory and equipment. It is the easiest coverage to write because it deals with tangible assets, insurance brokers say.

Casualty insurance, as its name implies, covers losses resulting from injury to people and includes the whole range of liability categories intended to cover losses resulting from carelessness or human error. Examples include medical malpractice, professional liability (including errors and omissions), environmental liability and contractual liability.

The third area of insurance, benefits, includes any coverage extended to employees as part of their compensation, including health, life and workers' compensation.

Stan May is executive vice president of Willis Corroon Corp. of Alaska, one of several large national brokerage firms with Anchorage offices that serves predominantly large corporations.

He says insurance is like a commodity, with prices responding to the law of supply and demand and reflecting the profit motive. Insurance companies want to write as much coverage as they can in the less risky categories, thereby reducing their own exposure to risks.

"They all want the same kind of business," says May. "They cut the fat out of the rates for the desirable business. That doesn't leave a lot of extra to write the coverage that is not as desirable."

This strategy tends to boost premiums for coverage in high-risk areas and push prices down in others. Also, as losses mount in the market for a particular type of insurance, often as a result of litigation or new information about hazards, companies become less willing to write coverage in that area. As a result, supply of coverage diminishes and premiums rise.

The roller coaster of losses can make it hard to acquire high risk coverage. May explains, "It creates a lot of cycles up and down in the markets. Some coverage is almost unattainable. Consequently, many large corporations formed their own insurance companies in the 1980s."

May says that before 1984, $5 million to $10 million limits on coverage for large companies were not uncommon. "Most people buy just what they're required to buy, which doesn't necessarily lower the risk to their assets," he adds.

Bernard Landis, president of Homestate Insurance Brokers of Alaska Inc., agrees that the commercial insurance market in Alaska is getting tighter. "It's still a buyer's market -- what we call a soft market," Landis says. He explains that plenty of coverage is available in most categories of commercial insurance, but because losses are catching up with the companies, prices likely will rise.

Landis looks for the trend to be more evident in the third quarter of this year, when insurance carriers will have a better statistical grip on this year's loss ratios. He expects increases for property and casualty generally to run 5 percent to 10 percent -- modest by industry standards. The last time Alaska went through such a cycle, in the early 1980s, premiums shot up as high as 15 percent to 20 percent.

"If investment markets are really, really good, they may not raise premiums, but opt to invest instead," says Landis.

Workers' Comp. The one area of business insurance that probably would be immune from such a happy scenario, irrespective of interest rate levels or competition, is workers' compensation. "To the businessman on the street, 99 percent of them look at workers' comp as a complete rip-off," says Norm Tyler, corporate officer and manager of Alaska Associates Inc., an Anchorage insurance brokerage firm.

Business owner Forsyth says he definitely feels the pinch of the mandatory coverage: "Insurance is a major expense; workers' compensation is a horrendous expense."

This nationwide problem stems from a number of factors, including rising medical costs and a high rate of abuse by beneficiaries. Often it's especially hard for business owners to pay out the high premiums for a benefit that seems so intangible. In 15 years, only one of Forsyth's employees has filed a claim. He says the bitter pill wouldn't be so hard to swallow if there was some room to maneuver on rates. "You can't shop around for the rate; the legislature sets the rate," he says.

According to Alaska Associates' Tyler, some companies have begun paying employees on-the-job injury expenses directly to avoid reporting incidents and thus trigger a premium hike. "There's not a lot of imagination you can use in workers' comp, and there are varying degrees of success at reform," he says.

Parties to reform discussions are far apart. According to Tyler, unions want to retain all the coverage they can, employers want it to go away, and injured or disabled workers want to put groceries on the table. "There are so many different factors in this that it's pulling in every direction," he says.

Assessing Risk. Some pressure exerted on business profitability by workers' compensation can be alleviated by shopping for better rates in other insurance categories and by reducing workplace hazards.

Suzen Shaw is a risk management professional who works with companies to reduce their exposure to loss. She also teaches introductory classes in insurance. Noting that risk management has become an increasingly important element in the commercial insurance area in the last decade, Shaw says many businesses pass up easy opportunities to reduce risk and insurance costs.

"They're really not strategizing their risk management so as to make their costs go down. They're depending on their insurance agents to do that. The bad news about that is that there are many agents who are not qualified to do that," Shaw points out.

In fact, she says, many companies might not need conventional insurance at all. Other forms of risk protection are becoming more prevalent, such as self-insurance, letters of credit and bonding.

"For many companies whose products are being sold here, there is no local safety presence, (although) they may send someone up if there's enough volume being sold. So it becomes a business decision for the insurance carrier. Everything is driven by the almighty buck," says Shaw.

She notes that because providing risk-management services is not built into the rate structure for most lines of insurance, there is no incentive to offer this kind of assistance. Also, in many cases, business clients don't know enough to ask for risk-management service.

Tyler says self-insurance has not become common in Alaska, largely because few companies are big enough to finance an effective self-insurance structure. He says misconceptions about self-insurance abound.

"Many people say they're self-insured. What they're really saying is they're uninsured. That's rolling the dice. With liability, especially, you'll run out of protection before you run out of claim, even with conventional insurance," Tyler notes.

Many self-insurance arrangements are drastically underfunded, and people are lulled into a false sense of security, he warns. For businesses considering this option, Tyler suggests retaining conventional coverage while a self-insurance fund is built up through annual payments. He also advises engaging the help of a risk-management specialist.

Taking Control. According to risk manager Shaw, getting a handle on controlling insurance costs, while still maintaining effective protection, involves a three-step strategy. First, identify risk of losses. Hazards such as fire, theft and flooding are common to many businesses; other risks are more limited to specific businesses or industries.

Does the business handle hazardous materials? Is there heavy machinery or complex equipment on site? Conducting a risk review can be as simple as making up a thorough, common-sense list based on close knowledge of the business.

Second, control the risk to prevent losses. "The best way to keep the prices down is to stop the loss from happening in the first place. It's probably the most active thing they can do to control costs," says Shaw.

She notes, by way of illustration, that sprinkler systems mitigate or reduce loss from fire, but they don't prevent the fires or loss from water damage. Actual prevention requires additional measures.

"The simplest thing is good housekeeping, a neat clean environment. If general housekeeping is poor, you've just knocked your chances in half of being covered; you've reduced the marketability of your risk."

She suggests examining even the most mundane items. For example, make sure doormats are properly placed and are not collecting melting snow, which can create a slick hazard. Check to see that shelving is properly installed and used. Tuck or tape electrical cords to avoid tripping. Properly dispose of oily rags. Read labels and instruction manuals to ensure that appliances and equipment are being used properly and not creating electrical fire hazards.

The third strategy a business can adopt to control insurance costs is to finance coverage for the remaining risk, the balance that a firm can't secure through efficiencies or workplace changes. "The price of insurance is so affected by whether you have identified the risk and how you have opted to control the risk," says Shaw.

"If you're starting a new business and you do not have an insurance broker, then by all means call someone who does risk management or a safety consultant if there's going to be involvement with employees." For those already in business, she recommends that businesses demand a risk identification from their agent, a review that ultimately could result in lower premiums.

"You should not in the least feel like you're asking too much. More than a policy review, you want a company review. Just because you can't insure it doesn't make the risk go away," Shaw says. She also advises considering putting insurance out to bid every three to five years, because the market changes that often.

But Homestate's Landis points out that the ability of brokers and agents to assess risk often is overstated. "We do advise clients on risk in some cases just in our normal functions. We don't have that many insurance firms in Alaska that would require risk management specialists on staff," he explains.

Landis agrees that shopping around can be an effective way both to control costs and secure a better product. "Your agent should be doing the best job possible for you in terms of premiums and protection, but it doesn't hurt occasionally to go out for a competitive bid. This keeps the agent or broker honest. But be careful to compare apples with apples," he says.

As with any bidding process, attention to detail is important, and prospective insurers should receive the same specifications. Particularly important, notes Landis, is making sure that property values and limits of liability are the same. Business operations and proposed deductibles also should be described the same way to each bidder.

Landis suggests asking the agent for the industry rating for the company whose line they're proposing to sell. If the company is rated below "A," he advises caution and closer scrutiny of the product and its terms.

"People often come in at the last minute," Landis says. "They need to allow plenty of time, at least 60 days prior to expiration of their current policy. It takes time to find good bids."

Allowing adequate time will give the underwriter a better chance of finding credits to apply to the premiums that reward a company for a good loss history, for example. "Always keep track of your losses. The better the loss history, the more he's willing to take off the premium," Landis says.

Willis Corroon's May notes, "You can't stress safety enough. If you have a good loss record, that's very important."

Like many in the industry, May stresses that close attention to detail can make a huge difference in the success of a business insurance strategy. For example, he suggests closely scrutinizing contracts with clients and subcontractors to be sure that terms and conditions related to general liability are clearly stated.

Clear communication with the insurance broker or agent is also critical. May compares this exchange to the attorney-client relationship, in which only full disclosure will allow the attorney, or insurance broker, to most effectively assist the client.

"It's real important to communicate with your agent or broker. Let them know what you're doing. You have to trust them to know your business really well," says May.

Tyler of Alaska Associates cautions against looking for a new broker just because rates go up. But, he says, brokers should take better care to explain, not justify, the pricing situation.

"If a broker is doing a correct job, he knows who's competitive in a line, he knows two or three companies that would write your kind of business. If you're loss-free for the last five years, you should be receiving credits from your insurance company. If you're not, find out why, then consider your options," he adds.

Tyler points out that the trend of rising premiums that has begun to show in Alaska could be offset by increased competition. A number of insurance companies are looking for new markets as a result of reforms enacted in California that mandate retroactive premium rollbacks.

In the long run, however, Tyler counsels business clients that there is no substitute for knowledge in addressing the issues of risk and rising premiums: "You can never know too much about your insurance program."
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:May 1, 1992
Previous Article:Building confidence.
Next Article:Taking the high road.

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