Business

Five Most Expensive Mistakes that CFO’s (Businessowners, CEO's, COO's and Board Members too) Face When Reviewing Insurance Options.

CFO’s we speak with are frustrated with the way in which their insurance program is handled. They get quotes at the last minute… they don’t have time to thoroughly evaluate what they are getting… they don’t fully understand the coverage especially the exclusions and how they may affect a loss… they are not certain that they are getting the “best” deal available… they are not even certain that their current insurance relationship has their best interest in mind, especially for the long haul.
Let’s take a look at a few statistics:

According to a recent report of nearly 400 CFO’s and Treasurer’s of some of the world’s major corporations called the “Protecting Value Study” from the commercial and industrial property insurer FM Global, the Financial Executives Research Foundation, and the National Association of Corporate Treasurers (NACT) found that 85 percent of the respondents indicated that they view risk management as an investment. In particular, they do so because they believe that it protects their business continuity; as a result, they believe there is a realized return on investment. We too believe that an insurance & risk management program should be geared to a greater return on investment and you don’t have to be a major corporation to get a better return. The question is how do you accomplish that goal?

An estimated 25 percent of businesses do not reopen following a major disaster, according to the Institute for Business and Home Safety. This is an astounding figure and a pretty scary one at that.

A Dun & Bradstreet study estimates that 40% of the destroyed businesses have closed their doors for good. That survey also found widespread lack of insurance and underinsurance, reporting that only 25% of the businesses had adequate insurance, and shockingly one-fifth had no coverage at all.
Here are the 5 most expensive mistakes that CFO’s face when reviewing insurance options:

1) Not Performing a Risk Assessment – The biggest assumption CFO’s make is that the current insurance program is set up properly. Often they focus on the premium not the coverage. 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. Without knowing what the true risks and exposures are, you can’t intelligently purchase the proper insurance.

Thus, the insurance program is flawed from the start. Unfortunately, this error is discovered when an underinsured or uncovered loss occurs. In the haste to sell product, coverage issues, exposures and exclusionary language contained in policies are often missed by insurers and brokers. And the CFO not being an expert in insurance may miss it too.

2) Not Reviewing Insurance Coverage in Detail – insurance policies are contracts. Insurance companies and company claims adjusters know the significance of every word in the contract and the Policyholder should know how their policy will respond to a claim. CFO’s expect losses to be covered. Unfortunately, exclusionary language is contained in a policy. Sometimes exclusions are not discovered until a loss occurred. The problem, even if the exclusion were inadvertent… it would take several months of litigation to uncover the true intent of the policy.

Coverage gaps, errors, underinsured and even over-insured coverage issues exist… the policies were not reviewed properly or with an eye toward recovery. CFO’s need to validate their insurance coverage... If the policy is not written correctly from the start, then you are just wasting money because it will not respond the way you assumed it would. Here is an absolutely astounding statistic for you to consider - 75% of ALL businesses that sustain a major catastrophe are out of business within a two year time frame!! This is mainly as a result of an underinsured scenario.

3) Competitively Market the Insurance Program in a Professional Fashion – CFO’s explain to us that they market the insurance program by bringing in a few brokers to “compete.” To get the best results from a marketing effort it must be managed and controlled properly... 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. The CFO’s allow additional brokers and incumbent brokers to “shotgun” the insurance carrier marketplace… This creates havoc and confusion among insurance company underwriters. This approach is not best suited for optimal results.

Typically a substantial amount of money is “left on the table” in this approach. In addition, the best bottom line results are usually not achieved because most of the time the only metric looked at is the premiums… And no long term perspective is brought to bear in terms of both coverage and ultimate cost.

4) Selecting the Right Insurance Broker – placing too much faith in one broker… the insurance business is about relationships. We tend to do business with people we like and trust. In an insurance brokerage relationship CFO’s place their trust and guidance in the hands of an insurance broker. The insurance brokerage model is based on sales commissions. There are great insurance brokers out there… but the services that are provided mostly are geared toward obtaining, maintaining and renewing that particular client. Each situation and each relationship needs to be properly evaluated.

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 as well. Clients think they had been getting the “right deal” only to find coverage problems. By the same token those relationships do not have to disappear or change they only have to be better managed to get better results.

Brokerage services are vital – if you can’t get what you need… certificates… binders and other support work… then something will fall through the cracks that could cost you money. Perform a due diligence study of the brokers you are going to business with... what carriers do they represent, for how long, service requirements, turn- over of staff and so on... make certain that they have the ability to service the account. Require a service agreement to be adhered to by the broker – this will outline standards of excellence for the broker to follow when servicing your account.

5) 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 to an “internal” loss prevention coordinator etc. but the real problem there is that they do not have an eye for the bigger picture... How do the loss prevention or loss control techniques fit in with the long term goals and objectives of the company or overall risk management program of the company?

More time and devotion should be focused on a sound pro-active safety and loss control program… for 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.

CFO’s should consider the following question – what is our company’s risk appetite? Once that answer is arrived at… the CFO is on their way to real cost savings… from there a proper strategy can be designed to address protection issues. According to OSHA… workplaces that establish safety and health management systems can reduce their injury and illness costs by 20 to 40 percent. OSHA studies indicate that for every $1 invested in effective safety programs, $4 - $6 may be saved as illnesses, injuries and fatalities decline... keep in mind… total cost of safety is just one part of managing the total cost of risk. When safety is managed and monitored, it can also help drive down total cost of risk.

If any of these issues cause you concern, please give us a call. We are here to help CFO’s be more productive and get better results on their insurance program. Additionally, you may order a copy of my book “Reduce the Risk/Boost Your Bottom Line” which addresses many of these issues and more in greater detail on Amazon.com. (R. Scott Wolff, CIC, CRIS)