How to plan for changing insurance costs

Sergio D. Bechara, chairman and founder, Millennium Corporate Solutions

Sergio D. Bechara, chairman and founder, Millennium Corporate Solutions

Most business owners know that the key to keeping business costs down — including insurance costs — is to look ahead.

Sergio D. Bechara, chairman and founder of Millennium Corporate Solutions says there are several factors keeping rates somewhat flat for now, but further increases are on the horizon. Companies should begin planning now to keep the rising costs to a minimum.

“A bend in the road is not the end of the road unless you fail to make the turn,” Bechara says. “It’s not all doom and gloom, just different variables we will have to navigate through, which in years past were non-issues.”

Smart Business spoke with Bechara about what businesses can expect in the future, and how these changes will affect their insurance costs.

What factors are keeping rates flat for now?

One is the reserves insurance companies have built up. Many carriers are using those reserves as capital to redeploy into any number of investment vehicles. But for the most part the carriers use it to buy more market share. The carriers are using capital to not necessarily acquire other carriers but different accounts, and they’re doing it with lower premiums.

Sometimes the rates are lower today than they were three or four years ago, and the risk has not improved. In some cases, the risk might even have deteriorated.

We’re hitting a point where a lot of the capital that is eroding is now going to translate to a rise of rates. The upward trend probably will start in 2012 or the last quarter of 2011. It probably will not be a volatile trend, but it will start trending up.

In essence, this will happen because insurance companies are now reserving appropriately. So if they bought business by low-balling prices in 2009, they will have to apply reserves on the claims for 2009 that are appropriate to that particular year.

Another factor that contributed to softening rates was price competition. When AIG was a damaged brand, its only way to compete was to slash its rates. That had an artificial effect of lowering rates because, to keep their market share and to compete, other carriers had to meet AIG pricing. Today, that is less an issue than it was in 2008.

What are some steps companies should take to prepare for these changes?

One is preparedness from a budgetary or pricing standpoint. If insurance costs are large enough from a budgetary perspective, companies need to know where the pricing trend is going. Then, they can adjust their burden lines appropriately so they don’t accept today’s reality as continuing in perpetuity.

Second, the insurance community fosters a financial partnership between a carrier and the insured. It is very similar to the partnership between a lender and the entity seeking a loan. The one that can best prove they are not going to need the insurance will pay the lowest premium. Just like the ones that can best prove they don’t need the money have the highest likelihood of getting a bigger line of credit or a lesser rate on money borrowed from the bank.

In past years, watching claims has not been as important as it will be in the coming years. Now, there is a malaise about claims. It’s not resulting in higher premiums, so no one is paying attention. When we turn the corner, carriers will point to claims experience as a means of pricing future premiums. Then it becomes important. Between 2012 and 2015, there will be a lot of talk about what’s going on with claims. Focusing on claims now is essentially making sure we gussy up the report card before it becomes relevant.

What can companies do to ensure they determine the right course of action?

Take a proactive approach. That could mean developing a rapport with different carriers or brokers, beginning to negotiate multi-year contracts with insurance markets, or negotiating contracts contingent-based on loss ratios.

Looking forward, it is hyper-critical to manage the claims. Don’t just hand them over to the carrier with the hope that all goes well. Nobody is going to care more about your claims than you do.

The concept of risk management is that the steps you initiate today are benefits you realize about a year or so from now, sometimes even longer. This is one of those areas that will be more important with carriers switching to underwriting for profitability rather than market share. When they make that switch, then you need to demonstrate to a carrier how you will be a profitable account for them.

What other issues will affect future pricing?

Like many other states, California is in a position of financial weakness.

The Division of Occupational Safety and Health (Cal/OSHA) will have a more pronounced presence in the business community than it does now. OSHA compliance is going to be an important factor, not just for insurance costs but costs in general.

A soon-to-be-popular question is ‘Where does it stand with OSHA?’

Companies should prepare for that by establishing sound policies and procedures for OSHA compliance. Build the ark before it rains. It’s important to do that now, because there are going to be more visits from compliance officers than there were in the past, because OSHA is under edict to become a self-funded part of the state government.

Businesses should also pay attention to AB 2774, which became law in California on Jan. 1, 2011. It’s one of the most important pieces of occupational safety and health legislation since Cal/OSHA came into existence. It provides the Division of Occupational Safety and Health with a series of steps that must be completed to establish a serious violation. And if the steps are followed, employers will face major fines that are more likely to stick — and stick without reduction.

Sergio D. Bechara is chairman and founder of Millennium Corporate Solutions. Reach him at (949) 857-4500 or [email protected]