Hard times ahead for the insurance market

Many business owners are anticipating a reduction in insurance rates as a result of a slowdown in business brought on by COVID-19. However, rates are actually increasing across the board.

“Current events have certainly exacerbated the problem, but this trend started prior to the pandemic,” says Chas Lowe, Commercial Insurance Specialist at Zito Insurance Agency. “Rates are going up indiscriminately, and that extends to nearly every line of business.”

Smart Business spoke with Lowe about why rates are increasing and how to gain a cost-of-risk advantage.

Why are premiums increasing?

On a macro level, one of the biggest factors is the current low-interest rate environment. Insurance companies invest a portion of the premiums they receive into interest-sensitive assets — bonds, CDs, Treasury bills — to gain a return. As the interest earned declines, it has a direct effect on the carriers’ profitability and forces them to look for ways to increase revenue (i.e. increase rates).

Also contributing to these increases is the proliferation of the so-called ‘nuclear verdict,’ in which juries award massive amounts to a plaintiff. This phenomenon emerged from years of corporate mistrust, significant growth in litigation financing and a shift in jury sentiment favoring plaintiffs. These disproportionate settlements are threatening the financial viability of insurance companies and will put pressure on rates for years to come.

What is the impact of rising rates on businesses?

Due to the current operating environment, insurance companies are narrowing their appetite for the types of businesses they’ll insure, along with which industries they’ll cater to moving forward.

Companies with large fleets of vehicles are being hit the hardest, as insurers are incurring huge losses due to distracted driving, higher vehicle repair costs and the skyrocketing cost of medical care. According to the Insurance Information Institute, this had led to the average accident more than quadrupling in costs over the past 10 years, naturally leading to an increase in premiums.

Is there anything a company can do to help stem increases in its insurance premium?

Becoming best in class within your industry by proactively implementing loss control and risk management resources will help to set your organization apart from your competitors and allow your broker to negotiate the best possible pricing on your behalf. To become a better insurance risk in the eyes of an underwriter:

  • Provide management training on employment related matters to decrease the likelihood of a lawsuit.
  • Review contracts to ensure you aren’t being held to undue liability your organization may not be aware of.
  • Upgrade your IT systems, reinforce your firewall and have IT stay on top of the latest safeguards. Train employees on the basics, such as not clicking on phishing links and securing laptops and smart devices.
  • Train employees on safe driving and install telematic devices in vehicles to identify irregular driving behavior.

Work with your broker to see what other resources/tools may be available that can be used to help make your workplace a safer environment for all those involved.

Are there alternatives for businesses to traditional insurance?

There is no right or wrong way to buy insurance and, depending on your organization’s risk tolerance, there are alternative ways to finance risk. A safety dividend program has more risk up front, but if other companies in that program perform well, you get premiums returned to you in the form of ‘safety dividends.’ You can also set up a captive insurance company, which you own and control. Or, depending on the size of your organization, you can self-insure a portion of risk, setting aside funds to pay any claims incurred.

With rate increases across the board, partner with an insurance adviser to identify areas where higher deductibles make sense and customize your policy to meet your organization’s business profile. An independent broker can help you find the right solution for your business’s unique needs.

Insights Business Insurance is brought to you by Zito Insurance Agency

Is your organization overlooking your risk for an insurance claim?

When many people think of pollution insurance, they picture large factories or chemical companies that pollute the environment, such as has the historic Love Canal litigation years ago. But that’s not the whole story — or the entire picture of who could face pollution risks.

Smart Business spoke with Chris Zito, managing director of Zito Insurance Agency, about environmental risks and coverage that is available as protection.

What are the risks of pollution exposure?

Most companies in the environmental remediation or consulting business recognize their exposure to pollution claims and insure them accordingly. There are also a large number of companies not in the environmental business that have significant exposure to pollution-related claims, which in many cases have been overlooked. These risks can include Environmental Protection Agency (EPA) mandated cleanup costs as well as third-party claims alleging sickness, disease or property damage.

The financial impact to your company can be devastating if you encounter a legitimate pollution incident. If you are ultimately found to have no liability, you can still go broke proving it if you’re self-insuring this risk.

When considering the extent of your individual risk, it is important to remember that you can be held responsible for pollution incidents caused by others with whom you have contracted or are working on your behalf.

What types of companies are at risk for environmental exposures that might be surprising?

To some degree, hazardous materials, as defined by the EPA, can be found in almost any business — even something as innocuous as cleaning supplies. Significant environmental exposures exist in a number of industries that most would not consider at risk, such as:

  • Contractors — pollutants that are brought to a job site (sealants, adhesives, fuel for equipment, etc.) or actions that result in the release of pollutants into the air, land or water, including mold, lead paint and asbestos.
  • Manufacturers — cutting oils, solvents, paints utilized during the manufacturing process that may create an environmental hazard.
  • Real estate owners — claims generated by property transfers (exposures created by prior owners), mold, lead paint, current tenants or ‘midnight dumping’ by unknown third parties.
  • Service industries that utilize environmental unsafe chemicals, such as beauty salons, dry cleaners, auto repair, service stations or junkyards.

How can employers insure against these risks?

As a means to stay competitive in the market, most commercial insurance carriers have broadened the coverage included in the various policies they offer.

One exception to that statement is pollution liability coverage, which has been greatly restricted or excluded entirely from most policies since the 1970s when asbestos, lead and other environmental claims bankrupted many well-known companies.

While limited pollution coverage may be available by endorsement to general liability, the most comprehensive coverage is typically written on separate policies through companies that specialize in environmental coverage.

Pollution coverage is available for most industries and typically is categorized to address environmental risk in three basic areas:

  • Job site.
  • Site specific (i.e. owned premises).
  • In transit.

An evaluation of your exposure to environmental claims should be included as part of your risk management program. A qualified agent or broker will be able to assist with this process and provide the appropriate solutions in cases where environmental risks are identified in your operations.

Insights Business Insurance is brought to you by Zito Insurance Agency

Risk identification is the most important part of risk management

With all of the unknowns in the world today, companies need to continually scan the horizon for emerging threats and opportunities. This will better prepare their business to manage the downside of risk while positioning themselves to capitalize on opportunities that may be presented. It requires both an internal and external focus, a sense of the micro and macro, and an honest assessment of their strengths and weaknesses.

To that end, organizations are using Enterprises Risk Management Programs to establish a framework for addressing the ever-changing risk landscape their organization may face. These programs focus on an entitywide view of risk, require the input of cross-functional committees and leverage external help from the company’s board of directors, its attorney, CPA, banker and insurance agent. Together, they allow a company to truly determine its risk appetite and ability.

Smart Business spoke with Chas Lowe, a commercial insurance specialist at Zito Insurance Agency, about the process a business can use to identify threats and opportunities to help support its strategic objectives and goals.

Why should companies include an array of experts in a risk management assessment?

Organizations have a general perception of what risks are out there and what could possibly happen to their business, but there’s a tendency to focus on risks that are physical in nature — their building catching on fire or one of the vehicles in their fleet getting in an accident. While those risks absolutely exist, and it’s important to acknowledge them, these types of hazards are easier to plan for and insure against. Typically, it’s a previously unknown, or emerging risk that brings a company down.

To get a broad perspective into what risks exist in the market, it’s a good idea to gather an array of experts and lean on them to find ways to limit the organization’s risk exposure. This can be done by having them perform a SWOT analysis — identifying an organization’s strengths, weaknesses, opportunities and threats — for individual internal departments, their supply chain, IT infrastructure and more. This will more clearly identify the organization’s position in the market.

Once risks are identified, a company can then begin to plan for them, setting the foundation for comprehensive solutions to support the organization’s underlying strategic goals. For example, a company can purchase insurance to insulate or hedge against certain threats, put controls in place to help reduce any exposure to that risk, or avoid other activities altogether. How exactly the company decides to approach risk depends on its risk tolerance in specific areas, something else that can be determined throughout the analysis.

How often should assessments be conducted?

The ever-changing macro landscape drives the need to conduct an analysis as frequently as possible. It’s like sonar, sending out a signal to get an idea of where the company currently stands in the marketplace.

At a minimum, assessments should take place on an annual basis, coinciding perhaps with a board of directors meeting to bring in those outside subject-level experts. Annual reviews are practical because it will also help the organization keep up with new technologies, which evolve quickly. However, because a comprehensive risk management program should continually evolve with the business, the more frequent these assessments can be performed the better.

How can insurance brokers and agencies help?

Brokers deal with multiple clients across multiple industries, meaning they come across examples of how other companies have dealt with similar issues. Companies should get their insurance broker involved in the process as soon as possible. A lot of agencies make resources available to their clients at no cost — disaster/continuity plans, vehicle use agreements, subcontractor agreements, OSHA inspections, etc. Those plans can help companies determine viable options for getting the business back up and running as quickly as possible in the event of a significant business disruption. Brokers, an agency or even a carrier can help provide companies with tools and resources to help them weather just about any storm.

Insights Business Insurance is brought to you by Zito Insurance Agency

Is your business doing enough to limit its exposure to crime losses?

An unfortunate reality facing business owners and executives is that nearly every business has an exposure to crime losses from either internal or external sources. 

With the advent of cyber/electronic crime, the level of coverage as well as the method of how insurance policies address these exposures can vary greatly, depending on the insurance carrier and how the agent or broker structured the coverage.

The Association of Certified Fraud Examiners (ACFE) estimates that organizations lose 5 percent of their annual revenue to fraud, says Chris Zito, managing director of Zito Insurance Agency. And, employers with fewer than 100 employees lose almost twice as much as large businesses per scheme to occupational fraud, according to an ACFE 2018 Report to the Nations. 

“Along with the proper implementation of crime coverage, these sobering statistics reflect the need for employers to ensure they have adequate internal controls in place to limit exposure,” he says.

Smart Business spoke with Zito about crime insurance and other mitigation that can help lower this risk.

Why should companies consider getting crime insurance?

Crime insurance can provide coverage benefits when other commercial insurance policies do not. 

Some examples include coverage for:

  •   Fraudulent transfer of funds
  •   Telecommunications fraud
  •   Cyber extortion (also known as ransomware)
  •   Employee dishonesty, such as embezzlement of funds or theft of tangible property
  •   Forgery and alteration of checks or documents
  •   Social engineering fraud (also known as impersonation fraud)
  •   Computer fraud
  •   Counterfeit currency or bank checks

A number of the above coverages can be found in either a crime or a cyber policy, which may be written through different insurance carriers. Therefore, it is important for business owners and executives to work with an insurance agent who understands how to properly coordinate the various policies to avoid gaps or duplications in coverage.

What else can a business do to deter crime?

Every industry has unique risks and it is important that a crime policy is one of several elements of protection for the business. Prevention and detection are key to reducing the breadth and depth of an incident. 

The organization should assess and potentially update its internal practices not try and limit exposure to fraud. For example, how often does the organization reconcile bank accounts? Who reconciles the accounts? Is software in place to detect fraudulent computer use? Does the company have its financial statements audited by at third party? Is there an active alarm system on premises?

There is a clear correlation between the size of a loss and the duration of the fraud. Having safeguards in place to actively prevent and detect fraud is critical.

How are crimes detected?

The most common method is through tips — about half of which tend to be provided by employees of the victim organization, according to the 2018 ACFE report. Whistleblowers may fear retaliation so it is important to allow employees to confidentially report fraud or theft, where legally permissible.

Other active detection methods include surveillance, audits, management review and technology controls.

Maintaining strong internal controls should be a priority for any organization. But even with precautions in place, no organization is immune to crime and fraud. Crime insurance provides protection from many types of wrongdoing.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

Don’t stick your head in the sand. Transfer your risk.

Transferring risk through the use of indemnity or hold harmless clauses in a contract is common for large corporations with attorneys on staff, but owners of small and midsize businesses need to spend time on this, too.

“It’s become a much larger topic, both from an underwriting and risk management standpoint. People don’t always understand the importance of risk transfer. But there’s a greater emphasis being placed on it by the insurance companies. Taking the approach, ‘that’s why I have insurance’ is not something insurance companies want to hear,” says Chris Zito, president of Zito Insurance Agency Inc.

Because there is no direct revenue tied to it, business leaders tend to view risk transfer as an administrative burden. What they don’t realize is it reduces their overall cost of risk.

“Every day we see companies executing contracts that have not been read thoroughly,” Zito says. “This results in the unintentional assumption of risk.”

Smart Business spoke with Zito about the importance of risk transfer in business contracts.

How does risk transfer work? What are some examples?

When it comes to risk transfer, construction companies are an easy example. General contractors hire subcontractors and pass the risk down; a lower tier of subcontractor indemnifies the tier above it. The intent is that the party responsible for any damage or injury is held accountable for its actions, while protecting the people it is working on behalf of. A company takes the risk and pushes it back to the people who created it. 

A retail store, distributor, wholesaler or a manufacturer’s rep might sell a product made by somebody else. If that product causes injury or damage, the way the legal system works, everyone in the supply chain can be named in the litigation — from the end seller to the manufacturer, even if they had nothing to do with the product’s design, manufacturing or packaging.

Say for example, a manufacturer outsources a portion of its manufacturing process, such as plating, grinding, heat- treating, etc., to a third party. If the work wasn’t done properly or to the specification required, it might have an adverse impact on the end product. As a part of its risk transfer process, the manufacturer should ensure the proper insurance and indemnity provisions are in place.

Ideally, how do companies use contracts to move risk away?

In a perfect world, the company has contractual hold harmless language in place, along with the proper insurance for the people who supply it goods and/or services. In some cases, a buyer of a product might be named as an additional insured. The ability to do that varies based upon the industry and type of services being provided.

The hold harmless or indemnity clauses range in length. If you’re trying to transfer the risk, you want the scope of that indemnity language to be as broad as possible. If you’re the entity assuming the risk, you want the language to be narrow. Like anything else in business, it becomes a negotiation.

In addition, risk transfer is a negotiating tool for purchasing insurance. Companies that demonstrate the best risk transfer practices are more attractive to insurance companies. The best businesses spend time on risk transfer practices, which helps their rates and lowers their risk profile.

What role does an insurance agent play?

Your insurance agent can educate you about risk transfer tools, and possibly help facilitate the process — becoming your back room, so to speak. If your insurance agent reviews contracts before you execute them, he or she can alert you to red flags or help you push the risk back to the people who ultimately create it.

Prudent businesses have a system in place where they make sure they’ve got current information on all vendors, suppliers and subcontractors, because those relationships have the ability to create and pass down risk to the people who are purchasing their goods and services.

In some cases — particularly when doing business with large corporations — implementing risk transfer can be difficult. However, at the very least, companies can quantify the risk they are assuming at the time of the transaction.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc. 

The ins and outs of your fiduciary exposure and what you can do about it

Employers who maintain qualified benefits plans that are subject to the Employee Retirement Income Security Act (ERISA) assume a fiduciary responsibility for the participants of those plans. More importantly, one of the caveats of ERISA is it allows participants to pursue personal liability for individuals that were involved in the sponsorship or administration of those qualified plans.

So, in theory, the HR administrator, CFO, CEO, owner/shareholder — potentially anyone who played a role in the selection and administration of those qualified plans — can be held personally liable, says Chris Zito, president of Zito Insurance Agency, Inc.

The greater degree they are involved in those decisions, the greater the level of fiduciary exposure.

“Fiduciary claims aren’t as frequent as other types of claims that may be filed against your organization. But unlike the claims that are protected under the corporate shield, fiduciary liability is one area where participants may pierce the corporate shield and go after personal assets,” Zito says.

“Not that protecting the corporation’s assets isn’t important, but if your house could be at risk you should at least be aware of that.”

Smart Business spoke with Zito about misconceptions employers have about fiduciary liability and how you can protect yourself — and your personal assets.

What misconceptions do you see from plan trustees?

Most commonly, plan sponsors confuse their fiduciary exposure with the ERISA bond. They are entirely different — one is a form of employee dishonesty coverage and one is liability coverage. The ERISA bond protects employee investment assets from theft of their retirement funds by trustees. It’s not liability coverage; it’s a requirement the IRS imposes on qualified plans.

In addition, some retirement plans aren’t subject to ERISA. People generally lump retirement plans into one bucket, but they are different, in terms of their legal and compliance requirements.

Do plan sponsors only need to worry about their fiduciary liability for retirement plans?

Traditionally retirement plans are the largest driver of these types of claims because they’re the most visible. But legally, any qualified benefit plan — all of which are subject to the ERISA law — could trigger a fiduciary claim.

How can plan trustees best mitigate their fiduciary liability exposure?

Quantity and diversity of investment selection, along with plan education, are key to minimizing the exposure of retirement plan-related liability.

Defined benefit plans used to impose a significant fiduciary responsibility on employers because they had the actuarial responsibility of making sure the plan was funded properly. Today’s 401(k)s and profit-sharing plans have migrated to a self-directed model, where employees choose from different mutual funds, varying from low risk to high risk. The more control and direction the employees have, the lower the fiduciary exposure, but it doesn’t eliminate it entirely.

Plan trustees want to make sure they’re providing ample education about how any qualified benefit plan works — retirement or otherwise. Education is a requirement under ERISA.

You also can buy trustee and fiduciary liability (TFL) coverage. A key consideration in buying a TFL policy is coverage for defense costs, regardless of whether negligence exists.

Fiduciary liability is fairly generic in terms of what the coverage does, but the breadth of the policy varies by company. You can get pricing from multiple companies, and the coverage limits and deductibles may be identical but that doesn’t mean you’re getting the same policy. It is important to review the policy language to determine how or if coverage applies to Affordable Care Act compliance.

The right agent will be familiar with the policy language in terms of what types of fiduciary claims and allegations it will cover and defend, like regulatory expenses.

Insights Business Insurance is brought to you by Zito Insurance Agency, Inc.

How to get the most out of your next business insurance renewal

Negotiating your business insurance renewals are just that, a negotiation. It’s not a “take it or leave it” scenario. It doesn’t hurt to ask, and the fact that you’ve inquired demonstrates your commitment to safety and risk management.

“Too often, a commercial insurance renewal follows a pattern — the agent or broker comes in 30 days beforehand, he or she finds out if there have been any major changes and then lets you know how much your policy premium has gone up,” says Chas Lowe, commercial insurance specialist at Zito Insurance Agency Inc.

However, whether it’s a mom-and-pop shop or large corporation, there’s usually room to negotiate price, coverage or value-added services such as risk management or other compliance-related tools.

Smart Business spoke with Lowe about the dos and don’ts of your insurance renewal.

How does your business get leverage to negotiate the renewal?

There needs to be a link between the overall risk management strategy and the insurance buying process. Your company needs to think long term; insurance shouldn’t be an afterthought. 

With the help of your agent or broker, your organization needs to demonstrate its commitment to safety and good claims history. Documentation that proves safety is part of the fabric of the culture might include a copy of an employee handbook, driving and accident investigation policies, minutes from safety meetings or any other safety initiative your company has undertaken.

If you are a better risk than you were a year prior, you can help drive the conversation to not only reduce rates but also negotiate a better coverage structure.

Besides a lower price, what else can be negotiated?

While a small business doesn’t have the same negotiating power as a company that pays a six-figure premium, there are a number of things that you can request, such as:

  • A more advantageous or efficient coverage structure. This might mean negotiating all of the buildings and equipment be covered on a blanket basis. Or, because metal prices fluctuate so much, a scrap-metal dealer’s insurance rate can be amended to be based on the tonnage of material it handles, rather than its sales. 
  • Multi-year rate guarantees. These are helpful from a budgeting standpoint. 
  • Loss control help from the carrier. Examples include identifying hazards in the workplace, recommending better controls, providing training materials for the employees and establishing best practices for a safer work environment.
  • Access to risk management tools. Telematics can be put in commercial vehicles to track how drivers accelerate or brake. Mock Occupational Safety Health Administration (OSHA) inspections help ensure the business is OSHA complaint. Or, infrared scans noninvasively examine equipment to discover electrical problems or motors that are running hot, in order to prevent future problems.

In today’s environment where new exposures develop quickly, insurance carriers have become more proactive in developing resources and tools. Asking for more from your broker/agent and carrier can go a long way in showing that you see your insurance as more of a relationship than a commodity. 

Is shopping your insurance every year the best way to ensure you get the lowest price?

It may feel counterintuitive, but the more you shop your insurance, the more you guarantee an insurance carrier won’t come to the table with its best offer. These submissions typically make their way to the same underwriters year after year. If they continually see your business being shopped, they won’t be as aggressive on the pricing side.

The industries you serve, the materials you use, your annual sales, which states you operate in, etc., all factor into whether an insurance carrier will offer you an aggressive quote or not. It’s very much a case-by-case basis.

There really is no rule of thumb as to how often you should shop your insurance; however, if you feel your carrier is being unfair or if the company has undergone significant change, like a merger, you should talk to your broker about taking the business to market.

This demonstrates that you are loyal and have developed a capacity to build relationships, which is exactly the kind of organization a carrier likes as a customer.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

A complex industry requires a customized risk management plan

Businesses in the chemicals, coatings, adhesives, lubricants and the polymers industry require more specialized coverage than that afforded in a standard package policy. They also need experts who can help them manage their risks and dig a little deeper because the product liability, propensity for bodily injury and property damage, the environmental concerns and the transportation risks are critical.

“An insurance policy isn’t a replacement for a solid risk management program. We work closely with our clients to develop loss control, contingency and emergency response plans prior to a loss happening,” says Jessica Kerrigan, Client Executive at Hylant.

“When there is a chemical spill or release, time is not your friend. You need to handle it immediately with a team of professionals behind you who know exactly what to do,” says Michael Baumgartner, Client Executive at Hylant. “Responsiveness is a huge factor in mitigating the environmental impact.”

Smart Business spoke with Kerrigan and Baumgartner about how chemical companies can build a customized risk management program.

How might an insurance broker who acts like an extension of the internal risk management help a chemical company?

The current changes in the property insurance marketplace are causing issues across all industries, especially the chemical and related industries. For a company to distinguish itself with underwriters, the property submission needs to be significantly more detailed and the risk management program should be robust and clearly articulated to the underwriting community. 

For one company with seven locations across the U.S., that meant getting its broker’s loss control team together to visit each facility and generate a risk profile report that described areas of strength and opportunities for improvement.

The company addressed weaknesses or, if the change wasn’t in the capital budget, put together a strategy to do so in the future. The intimate knowledge gained and the commitment of resources turned the property renewal into a competitive advantage from a pricing perspective.

In this market environment, this kind of proactive approach must be executed to achieve optimal pricing and coverage terms, but it’s even more important for the chemical industry, which is far more customized and under tremendous pricing and coverage pressure from an insurance and risk management perspective.

Beyond property, what other risks are especially important for these businesses?

As far as trends go, insurance rates also are rising in the umbrella market as well as continual increases in automobile liability. Again, that’s why it’s critical to have a proactive risk management culture.

Cyber is a risk that may not seem inherent to chemical companies, but no business is immune. Computer systems are used in the majority of the manufacturing process — from filling tanks to heating or cooling chemicals — and those are vulnerable to attack. With cyber risk, as soon as a company builds a 10-foot wall, the cybercriminals will build an 11-foot ladder.

Environment risk requires expertise and brokers with experience. There can be ambiguity in general liability policies, so insurance buyers and risk managers need to make sure they meet regularly with their broker and explore all risks to ensure their exposures are covered as expected. In the chemical industry, it’s also important to closely examine the operational aspects.

For example, at the end of a two-hour session with a prospective client, going through the raw products and how the products were being used, a CFO and broker discovered more than 10 percent of the company’s products weren’t covered because the current insurance carrier had an exclusion for those chemical makeups.

When it comes to insurance and risk management, don’t fall into the trap of thinking, if it’s not broken, don’t fix it. It may be time to get a second opinion with a policy audit to ensure your company hasn’t become complacent.

Businesses need an insurance broker who thinks creatively about how to mitigate risk — visiting locations, helping design a custom loss control and prevention program with emergency response procedures and ensuring the company has a tailored insurance solution with the broadest coverage at the most competitive price.

Insights Business Insurance is brought to you by Hylant

How narrow networks can help contain health care costs

The only way to fund health care for the betterment of the employer and employee is to get creative. Narrow networks are one way to do that.

This approach is gaining popularity, as area hospital systems offer reduced charges when health plans steer members to them. Because the charges are dramatically reduced, the claims that are paid out are dramatically reduced and the premiums are dramatically reduced.

“Typically, companies have to shift more of the premium and risk to the employee by increasing contributions out of their paychecks, raising deductibles, co-payments and out-of-pocket maximums. A narrow network approach that reduces the cost by 25 percent — rather than increasing it by, say, 8 percent — enables a company to offer better insurance. It has better coverage with lower deductions, lower out-of-pocket, lower co-pays and lower premiums,” says Michele Hanzak, senior account manager at Zito Insurance Agency Inc.

Smart Business spoke with Hanzak about the rise of narrow networks.

How are narrow networks different than preferred provider organizations (PPOs)?

Over time, PPO networks started including everybody and the discount arrangements weren’t as deep. The move back to narrow networks comes at a time when health care cost increases are felt by both employers and employees. This means people are more willing to change their patterns of care.

Narrow networks today are also increasingly coupled with population health management, which is integrated into the contracting. The federal government is encouraging health systems to move away from the fee-for-service model, and the more nimble hospitals are taking that out to the commercial population.

Yes, narrow networks limit the number of doctors and hospitals. But a narrow network approach, coupled with population health management, results in more quality time spent between the doctor and patient.

When a company introduces a plan like this, is it normal to face resistance at first?

There’s always pushback initially. That’s why the education process is critical with employees and their family members. If people pay less for better outcomes and have a better relationship with their doctor, the results speak for themselves, even if that means switching doctors.

For example, family health plan coverage might cost $2,000 a month, with $1,000 of that coming out of an employee’s paycheck. A narrow network, which lowers the plan costs by 25 percent, means that employee now pays $750 a month — effectively a $250 a month raise. Plus, the out-of-pocket maximums and claims may be lower.

What other methods can be employed with narrow networks to contain costs?

Stop-loss carriers, or reinsurance companies, have come down market so their product portfolio can be tailored for smaller employers. This opens up the health care data technology platforms of third-party administrators (TPAs). A dashboard can be created to describe the exact cost and outcome for specific procedures, based on each doctor or health care provider. TPAs also typically have the best narrow network approach and contractual arrangements.

If self-funding seems risky, a level-funded approach adds additional layers of protection. Gathering a bunch of small level-funded employers together and plugging them into a captive arrangement adds even more protection. Usually, with captives, companies pay for four years and generate enough savings and cash flow that the fifth year becomes fully funded already.

Is a nontraditional approach more work?

Not really — there’s more information gathering upfront, but everybody uses data collection tools anyway. The plans do need to be monitored; it’s not something you can plug in after you’ve shopped the market and be done. By tracking patterns, you can see how to educate your employees, which can help save money throughout the plan year.

The most difficult piece, however, is the initial education component. That’s why it’s critical to find the right broker, someone who truly understands this and how it can benefit you. Only then can they help you design something that’s going to work best for you and your health plan population.

Insights Business Insurance is brought to you by Zito Insurance Agency Inc.

How to shift and mitigate international risk in a time of change

The United States has a reputation for being litigious, which impacts business insurance because as claim costs go up, premium rates follow. Now, other parts of the world are starting to catch up.

“It’s not a rapid shift, but businesses with international operations need to recognize that it’s not just the U.S. that sues people,” says Todd Bennice, senior vice president of Risk Management at Hylant.

Rising nationalism also creates antagonism and adds to the litigious environment.

Smart Business spoke with Bennice about global risk trends and mitigation techniques.

How should businesses reduce their international risks?

Because of changes in political, economic and legal climates overseas, people are looking to shift risk, including through insurance. Areas of increasing concern are international credit, political and cargo risk. 

If you’re a U.S. company with overseas operations, your firm faces credit risk. This stems from a concern that some customers may not meet their payment obligations. Trade credit insurance is a way to further mitigate your risk, as well as potentially open up further borrowing capacity with your bank. For example, a company with this exposure fragmented all over the world recently consolidated its program in order to spread risk and drive down cost. These same environments may also have unstable political, economic and/or religious climates, so it may be prudent to consider political risk coverage to address some of these risks. 

Finally, with the increased risk in the Persian Gulf and other areas, it’s critical to ensure that your ocean cargo exposures are known and your insurance program is well constructed. 

Also, in many countries, local brokers are required to place coverage. That’s why it’s critical to have a U.S. coordinating insurance broker with international expertise.

If your company has locations overseas, utilize a risk review to ensure your risk appetite is applied consistently. Cultural differences drive acceptances of risk. In most foreign countries, insurance policies have low deductibles and little risk taking. An analysis of each country and the way you purchase insurance can eliminate coverage overlap, and a global risk management program can help drive down costs.

If you don’t have brick-and-mortar locations, you may still export, import or travel overseas. Consider buying an international package policy, sometimes called an exporter’s package policy. It can provide modest amounts of property and liability insurance, such as protecting sales samples. This also addresses local automobile coverage and the application of workers’ compensation benefits if an employee is injured while working overseas.

What’s important to consider when entering a new market?

Companies already look at the business risks. ‘Do we want to do business here? Does the economic and political climate enable us to make money?’ But don’t forget to consider the situation from a risk management and insurance perspective. 

Are you at risk for nationalization of your product? Can you simply add the new exposure to an existing global program (and do you want to)? What are the insurance requirements in the country? Have you factored these into your cost-benefit analysis? Are you required to work with a local broker, and how much premium must be placed and left in the local country? These are all examples of risk characteristics, which present unique challenges in a new market.

How about tariffs? How are they affecting Northeast Ohio companies?

The impact of tariffs varies across the business climate. Some companies are facing significant negative impact, while others have benefitted. What’s important to know is how tariffs impact your company, making sure that these projections are incorporated into your insurance and risk management. If a business is slowing down or speeding up, policy limits may need to be adjusted.

Tariffs are changing rapidly, so companies need a flexible insurance program that ebbs and flows with business decisions. That’s why you should communicate with your risk management and insurance adviser more than just a few times a year. If you have more frequent conversations with him or her, just like you would with your lawyer or accountant, you may find unexpected solutions together.

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