Peace of mind Featured

7:00pm EDT February 23, 2009

In today’s turbulent economy, the last thing you want to do is expose your company to more risk. That’s why you should review your insurance policies to ensure coverages are in line with exposures.

It might be tempting to save money in the short term by reducing limits, but Karen Miller, president of Royal Marine Insurance Group (RMIG), says to remember that you get what you pay for.

“I have people come back to me and say I can get coverage cheaper from the guy next door,” says Miller. “But more important than price is having the proper coverages and limited liability. To know that you’ll be covered in the event of a loss — if any kind of covered loss were to occur.”

An insurance contract is conditional, meaning an agreement to pay a specified sum of money under certain conditions. In the event of a loss, you want to make sure your insurance company has the capital and stability to pay its policyholder’s claim.

Moreover, in this time of economic uncertainty, the skill of the underwriter and the insurance company’s solvency are more important than ever.

Smart Business spoke with Miller about insurance and how to make sure your company is properly protected.

What are some mistakes businesses make when assessing their coverage?

Typically, you’ll get people who will risk a lot to save a little. In today’s economic times, they’ll say, ‘We have to cut expenses here.’ Consequentially, there is a loss that’s not covered or the limits are adversely affecting the company’s income statement and balance sheet. A good risk management program inclusive of insurance should be considered a necessary budget tool to help forecast accidental loss and preservation of capital.

When a company becomes financially stressed, it is less capable to bounce back and to recoup after a loss or a series of claims. The loss leaves it financially crippled. It is paramount to consider your budget — don’t cut it. Insurance is one item that should never be compromised. Cut the coffee machine before you cut your limits.

Another issue is that people think all insurance is the same. You can’t listen to your neighbor talk about his auto or commercial insurance because it’s going to be different than yours if your businesses are not alike.

Why shouldn’t companies reduce the amount of money they spend on insurance?

When reducing costs, the sacrifice is typically made in service and value. This often results in increased soft costs and opportunity costs. The limit is basically the dollar amount. Your coverage is what protects you. Typically, when premiums are reduced, limits and/or coverages are affected, thus impacting the ability for financial recovery.

For example, if a business is hit by a hurricane and the damage is so severe that operations have to be suspended, business interruption coverage will indemnify the company for the loss of income and ongoing operation expenses during the period of restoration. In addition, extra expense coverage would help the business owner maintain some or all operations at a temporary location, giving the owner the ability to service the needs of his or her customers.

How should the administration of insurance within an organization be processed?

Expanding on that concept, business owners need to ensure their companies’ coverages are in line with their exposures, and that their exposures are in line with their coverages. It works back and forth. There is a process to analyze and identify exposures. You have to consider who is really watching out for the company and its owners.

If your company does not have an internal risk management department, then you must make sure the agent knows your business as comprehensively as you do. An owner or C-level executive knows the business, but may be delegating insurance elsewhere. If a staff member is handling your insurance placement, there may be a disconnect. Your C-level person had better be communicating within management and to the agent.

Another option is to have an in-house risk management division or person. This person or group will be an integral part of the organizational processes, and must be dedicated to assessing, mitigating and monitoring risks that are in line with the company’s environment.

How can a risk management specialist help a business owner?

Risk managers are trained to identify and analyze loss exposures. They will help to recognize areas in your business where you are at risk and ways to eliminate and/or reduce your exposures. The four basic areas reviewed are liability, property, personnel and income. Next, they will examine the loss control techniques available for treating these exposures and select the most appropriate course of action, thereby creating a program unique to your organization.

There are different techniques and/or structures to a risk management program. One, for example, will implement both risk financing and risk control measures. While risk control is intended to prevent losses from occurring or to reduce the severity of losses that actually do occur, risk financing provides ways of paying for the losses that do occur. Some techniques of risk financing include insurance, non-insurance transfers (such as hold harmless agreements), retention (self-insured), or a combination thereof.

KAREN MILLER is the president of Royal Marine Insurance Group. Reach her at (305) 477-3755.