I'm not getting the pricing relief I deserve despite working so hard to prevent losses. What can I do?
Consider this scenario: your Experience Modification (E-Mod) rating significantly drops, but premium stays the same. The insurance company says “sorry, we realize your E-Mod dropped, but we still need a certain premium level.”
There is nothing more frustrating than when a business works hard to control claims and the insurance company doesn’t grant them the pricing relief they think they’ve earned.
Traditional Approach: Buy insurance from a market you don't control
In a perfect world, the cost of your premiums would be directly tied to your performance. Unfortunately, it isn't that straightforward. The problem is there are external factors that drive the market that you have no control over, including:
- Medical Cost Inflation - Medical Costs are a huge portion of the Cost of Goods Sold for an insurer; the average work comp claim is 60% medical. An aging work force, healthcare reform, and reduced Medicare reimbursement are putting upward pressure on Worker Comp rates. Medical costs also impact liability and auto loss costs
- Catastrophe Exposure - Earthquake, flood, hurricane, and other events that can take huge chunks of capital out of the marketplace which drive swings in rates
- Macroeconomic Forces - Insurance company's investment portfolios vary over time. Like many institutional investors, they're searching for return on their investable assets. To compensate for the reduced returns, insurers can always look to increase pricing
- Cycle Timing - There are ups and downs in the insurance market. During the post 9/11 years (2001-2002) and after the recession, customers faced a "hard market" with higher premiums and less flexible plans. This often coincides with a period of financial pressures for clients, making the timing of pricing increases very challenging.
Innovative Approach: Buy less insurance
This doesn't mean reducing umbrella limits or take down property values. Insurance is supposed to be there for the really big events that could cause significant financial hardship.
Many companies could be better served by taking risk on the losses they can control - the smaller ones. Today, any claims that can be funded out of pocket are often run through an insurance company. In exchange for a premium, the insurer pays all of the claims whether they're large or small.
By buying less insurance, we mean for those smaller claims.
If you ask yourself what is the most amount of risk you're comfortable "self-insuring," many would find a level much higher than they think. Fortunately, there are a variety of mechanisms to comfortably balance risk taking vs. financial reward. High deductibles, retrospective rating programs, and captives can provide real benefits for those who can effectively manage risk.
