The questions I am asked most often as an insurance agent/risk manager are the common concerns regarding the cost of insurance. These issues primarily fall into two areas, the first asking "why are my rates climbing," and then secondly, "what can I do about it"? This article will attempt to address both concerns.
PART 1: RISING RATES
In general, the basic concept of insurance incorporates a structure where many dollars are placed into a holding tank, and then dollars from that tank are siphoned off to pay claims from the group. The process gets a bit more complicated given that many insurance companies are competing for the dollars received, hopefully growing their money tanks through their investments, etc. Further analysis shows that the insurance companies we regularly talk about actually spread their risk by purchasing (or sharing) their insurance policies with reinsurance carriers. Many of these reinsurance companies went bankrupt on 9-11 from the terrorist attacks and threatened some of the general insurance companies known to us all. Since that time the industry has had to struggle to remain profitable.
You might be thinking "insurance companies have these big buildings with excellent art collections and lots of money just sitting in the bank. Why do they need more"? The answer is that you are correct, but insurance companies are regulated so that they are guaranteed to have money set aside (called reserves) to pay for the claims of their policyholders. If the reserved money falls below a predetermined limit, the companies will be forced to shut down. Remember, the bigger the client base, the higher the reserves, so insurance companies are always interested in claims. During my time in the insurance industry, while attending various group meetings, our attention was drawn to significant weather threats like a hurricane or storm while addressing our routine business. When one adds up the various earthquakes, tsunamis, floods and other catastrophic losses over the last decade (in addition to the economic calamity of the world economy), it begins to become clearer why premiums are increasing.
From an insurance industry perspective, companies are still struggling to make a profit due to circumstances including claims, insufficient investment return, and loss of clientele. Businesses are closing, merging and combining in ways that limit the dollars insurance carriers have access to, so the money tanks are only partially able to pay out on the other side. Those patrons who rely totally on insurance as their only remedy to deal with claims are now being forced to pay more for that cure. Insurance agents, once central in outlining and managing coverage have for the most part lost control of the process. Also, new areas of damages are threatening entities and insurance companies, always willing to expand their influence are willing to comply, for a price. Cyber-crime (and coverage) is just one example. The combination of these factors leaves the insurance waters murky at best.
PART 2: SOLUTIONS
At first blush, it may seem that little can be done to offset the rising premium situation most entities find themselves in. The truth is that the average entity has little leverage against carrier treatments, whether in coverage or price, offered by the majority of insurance companies today. Most smaller entities premium levels are significantly lower than what would be needed to attract serious consideration from an insurance company, for example, $50,000 of premium would carry more responsiveness than $5,000. The fact is that most agents can't even get this done, including those who present their many policyholders to the insurance company as leverage.
The future insurance representation will offer a new type of advocate, a strategic business partner that brings discipline to the purchasing organization by adding sophistication, structure, and knowledge of the process of managing risk. This advocate will analyze risk, design and write bid specifications, negotiate with carriers and oversee contract analysis for the client. They might supervise loss control, claims management and safety programs as well as deal with crisis management, aid in disaster recovery and maintain the reputation of the organization. Unfortunately, the average entity cannot afford to hire an individual specifically to fill this job description. However, that too is changing.
With the advent of Risk Retention Groups (RRG)'s, companies of all kinds are combining to take control of their insurance programs (see our Risk Retention Group article). These groups work together with a risk manager to outline coverage and set parameters for the insurance companies. This group activity can range from just grouping the churches together as a type of purchasing cooperative for a better rate. Participants remain separate in every way including billing and coverage but share in the loss experience as a group. Clearly, churches are already in groups decided by the insurance company, so the hope is the RRG loss experience will be better than the assigned group's regular average. Other possibilities exist including loss sharing, higher deductible levels, and customized coverage to name just a few.
Benefits of this new advocate approach include removing the doubt of who the Insured's representative is and will provide scrutiny of the insurance program from the church perspective. The advocate should also provide knowledge of the industry, current insurance climate, experience and understanding of the process. Finally, the advocate should ensure continuity for the church, potential to particular "niche" markets and offer more options than insurance by the use of various risk management techniques. Using these techniques should bring about a level playing field between the churches and the insurance companies most importantly bring CONTROL back to the church.
As I stated above, the average church cannot afford to hire an individual specifically dedicated to managing the risk of each particular church. Further, allocating that service to your church insurance agent becomes a conflict of interest. Regarding managing risk, asking your insurance agent, or getting help from a company website can offer your church advice on loss control, but will never bring the premium savings that participating in an RRG will provide. So what are you waiting for? Get some churches together and let’s see how well your group will do. If you are interested in talking further, please give me a call.