Back to the basics

In the past, insurance business owners
would advise clients to insure against
anything that could possibly happen that would affect their businesses. Better
to have it and not need it than to need it
and not have it.

These days, as the cost of insurance continues to be high, that stream of thought
might not be the best way to go.

“If you want to cut insurance premiums,
don’t insure what you know will happen, is
probable to happen or you can afford to
pay for if it does happen,” says Bobby
Grand, account executive of Arthur J.
Gallagher Risk Management Services, Inc.
of South Florida.

Smart Business asked Grand to discuss
some basic, easy ways to reduce insurance
premiums for commercial property and
casualty business.

When can a business owner have too much

It sounds simple, but too many business
owners do not assume enough manageable
and predictable risk. They purchase insurance programs that have too low of a
deductible that pick up known frequency
and severity losses. Insurance companies
charge a premium that includes an administrative charge, a commission and a profit
for the risks they assume. A manageable
deductible can eliminate known frequency
and severity losses from the insurance
transaction and thereby save the administration, commission and profit segments of
the premium inherent in dollar — swapping with underwriters, leaving the insured
responsible only for the actual loss or
deductible. The difference between a
small, manageable expected loss and a catastrophic loss often is a matter of seconds
in reaction or discovery time. So why
involve the insurance company with a
small loss that could have been a major
loss and have that included in your insured
loss history?

How can business owners save money
through less insurance coverage?

Once insureds start paying for their predictable losses through their deductible,
they work more aggressively to prevent
and eliminate these losses, saving the policyholder more money.

You can also save insurance premium by
not insuring certain types of manageable
and controllable exposures that do not
present a serious financial loss.

How can a business owner know which lines
of coverage are too high and which ones are
too low?

We see too many business owners buying
low deductibles on certain lines of coverage and high deductibles on other lines of
coverage. Even though some lines of coverage may be more competitive than other
lines, and therefore, lower deductibles are
available, businesses have certain levels of
risk tolerance or risk assumption that they
should negotiate into their insurance program, thereby saving premium dollars. It
makes business sense to assume through deductibles, a consistent level of risk for all
lines of coverage and not have a lower
deductible for some lines of coverage and
a much higher deductible for other lines of

When selecting the optimal deductible,
measure the dollar amount of the
deductible versus the premium reduction.
Does the premium savings justify the additional risk assumed by the higher
deductible? Also evaluate the possible
number of times in a policy year your business may have to pay that deductible for
different accidents or occurrences.
Estimate what is the least number of
deductibles you may have in a given year
and the most number of deductibles that
may occur if too many of the wrong things
happened. Estimate the range of probable
losses within the deductible. What is the
fewer number of likely losses, what is the
maximum number of likely losses and
what is the worst-case scenario?

The premium savings for an increased
deductible versus the increased assumed
risk reaches a point of diminishing returns.
When the assumed risk far exceeds the
premium savings, you’ve reached the point
of diminishing returns and should not
assume more risk through a larger

You can also reduce premiums by transferring certain risks to third parties by contract or merely by eliminating certain risks
or exposures by selling off the exposure,
subcontracting the exposure or simply
eliminating the risk from your business.

In summary, each year you should review
your insurance and risk management program with an eye toward purchasing less
insurance, assuming more risk and managing the potential for loss through loss prevention, risk transfer and risk elimination.

BOBBY GRAND, ARM, is an account executive of Arthur J.
Gallagher Risk Management Services, Inc. of South Florida.
Reach him by phone or e-mail at (561) 998-6784 or
[email protected].

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