Insurers get tough

If you want to bargain hard to reduce premiums, time is running out. By KRISTEN LE MESURIER

By Kristen Le Mesurier

Insurance companies have never had it so good. Their margins are fat and their returns to shareholders are approaching record highs. Insurers, brokers and analysts all agree: if you want to bargain hard to reduce your premiums, now is the time.

Unprecedented profits boosted by strong balance sheets, healthy equity markets and low claims, are enabling insurers to cut premiums and take on more risk.

But analysts say SMEs must act quickly because the conditions will change this year.

“The turning point in the commercial insurance cycle is within sight,” says JPMorgan and Deloitte’s latest survey of the general insurance industry, released in December.

This means that businesses can expect to see their premiums fall “modestly” in 2007 before stabilising and possibly rising in 2008. “The message we are trying to send is prepare for the future at this juncture, lock in low premiums, because there could be a harder insurance market cycle somewhere in the next two to three years,” says Scott Leney, general manager of placement services at insurance broker Marsh.

Falling prices

But many small and medium-sized businesses will doubt that low insurance premiums are at all possibile.

Prices have indeed fallen since 2004, and unlike in the past when corporations have been the big beneficiaries, small and medium businesses have snared some reductions.

Fire and commercial property insurance have led the price falls, with premiums for small and medium businesses falling by 10% in 2006, according to JPMorgan and Deloitte. Professional indemnity, liability and commercial motor insurance followed, with reductions of 9% and 8% in 2006 respectively. The cost of directors and officers insurance fell by 6% for SMEs in 2006.

But small and fast-growing businesses say few have secured these rate reductions. Glenn Davies, managing director of the Mynt Group, a Sydney recruitment firm turning over $10 million a year, says: “I haven’t seen any reductions and I’ve had no contact from my insurer saying, ‘Congratulations, your premiums are falling’,” he says.

Business owners in this camp should call their insurer and haggle over price. Ian Baldock, the executive director of Queensland Retail Traders and Shopkeepers Association, fears that most of his members are missing out on rate reductions because they push calls to their insurer to the bottom of their to-do lists. “Rather than look to see what’s available in the marketplace, I think insurance sits there in the category of, ‘Oh yes, I’ve been with that insurer for three years, I’ll just pay the same premium again’,” Baldock says.

Take advantage of the buyers’ market

Industries that have fought the tag “too risky to insure” are getting access to insurance for the first time in years. Franchisors — the frequent target of litigants — are now able to take out management liability insurance that covers risks including professional indemnity and public liability. “That is such a coup,” says Richard Evans, the executive director of the Franchise Council of Australia. “Some franchisors have never had access to these insurance policies.”

The FCA had to step into the insurance market itself to secure that coverage, however. Four years was spent structuring a partnership with insurance broker Willis Australia; a new wholly owned FCA company called FCA Insurance Services will act as an authorised representative of Willis and sell standard insurance packages to eligible franchisors for 25-30% less than franchisors now pay.

Willis Australia’s David Carter says franchisors battled to get insurance because few insurers understood the risk of claims. “Big brands can be a beacon for litigants or disgruntled franchisees, but we believe that the risk has been misunderstood,” Carter says.

How to win over your insurer

Insurance premiums are a function of risk. The higher the chance and the cost of a claim, the more an insurer will charge. “The best way to secure cheaper premiums is to demonstrate that the risk of insuring you has fallen,” says Stephen Moir, the managing director of Western Australia’s Small Business Development Corporation.

Businesses will need to demonstrate, rather than promise, reduced risk. Promises that new safety rules will reduce the risk of accidents, for example, will fall on deaf ears: insurers will demand evidence before they cut premiums. That means documenting the success of risk management strategies over time.

“Now is the time to invest in a risk consultant who will visit and produce a property underwriting report to the insurer. You need to produce information that best describes risk and how you’ve improved it,” says Marsh’s Leney. “Right now, in a soft market there are opportunitistic players that are willing to take more of a gamble, but when the market hardens in the next couple of years, insurers will charge for uncertainty once again, and that takes two years of evidence to prepare for.”

Supermarket owners, for example, should set out safety rules that minimise the chance of accidents and their severity. This would include procedures dealing with spillages, maximum heights for displays and keeping aisles clear. The way a business responds to an accident can be just as important. Staff or customers may be more likely to pursue legal action if they feel the business owner or employees are irresponsible or uncaring.

Selecting an insurer that knows your industry is crucial. Businesses with a claim lodged during the year will be slugged with a higher premium at renewal because insurers that don’t understand the particulars of a claim — why the damage occurred and whether it is likely to occur again — are likely to overreact and charge through the nose for higher risk.

Remember that the more predictable a risk is, the more it will cost to insure. It can be cheaper for businesses on a main road to pay for damage to broken windows, for instance, than to pay the cost of insurance.

Are you underinsured?

SBDC’s Moir is amazed that so few businesses regularly review whether they are appropriately insured. “The basic question — ‘if I lost everything today what would it cost me to re-establish tomorrow’ — is rarely asked. There is no detailed analysis on risk and what should be insured,” Moir says.

Fewer still look at their policies in detail. This is a recipe for disaster, given the exclusions lurking in the fine print. “An average clause can cripple business owners. For example, if your $100,000 property was burnt down and your coverage was for $50,000, the payout would be $25,000. Most business owners aren’t aware that average clauses mean that the payout is reduced by the percentage that you’re underinsured by,” Moir says.

This is alarming considering that 76% of small and medium businesses are underinsured. “Typically, 17% of SMEs don’t have enough insurance, a further 17% of SMEs have no insurance and 42% do not have insurance to cover them should their business close for a period of time,” says Scott Millmot, the national manager of sales and service at AON Insurance.

How to get the best deal

• Shop around. Insurers are fighting for market share in small business lines and some will be willing to take on more risk than they have in the past.
• Consider your risk profile from the insurer’s perspective and adopt risk reduction strategies that will minimise the insurer’s exposure to loss.
• Select an insurer or broker that understands your industry and knows your claims history.
• List the risks that pose the biggest threat to your business and insure against those.
• Weigh up the cost of insuring predictable risks: these are the most expensive to insure.