Matt McClellan

Business, in the age of the smartphone and advancing technology, relies heavily on electronic data. Many companies have a large amount of their value tied up in information assets. Cyber liability is the potential exposure of losing, destroying, or unauthorized disclosures of that data. Hackers elicit the greatest concern, but employee theft and loss can be severe as well.

“Any company that conducts business over the Internet or stores and/or provides confidential information is at risk of a data breach,” says Jayce Stewart, Commercial Risk Consultant with RiskSOURCE Clark-Theders.

Smart Business spoke with Stewart about how to address cyber liability and protect your data.

Why is cyber liability a growing concern?

One reason is that the concept of personal identifiable information (PII) is getting broader. In the past that term referred to information that could be used to identify, contact or locate an individual. In some recent court cases, we’ve seen it include zip codes and email addresses. As that area broadens, data breaches within that PII realm get easier.

There are 46 states that now have regulations concerning cyber liability. That just shows the importance. When dealing with a potential data breach, you need to be up to date on the state regulations, and how to respond and notify the correct parties.

Who should be thinking about this risk?

At first, when cyber liability became an issue, it mostly affected Fortune 500 companies because they store so much data and confidential information. They have such a big platform to be breached. More recently, we’ve seen an increase in data breaches at smaller companies. Verizon recently reported that 72 percent of data breaches from 2009 to 2011 were with companies with fewer than 100 employees.

What steps can businesses take to manage this risk?

One area we’ve found to be important is password security. Make sure your employees have strong passwords. Here are three tips: Don’t use actual words in your passwords. Don’t store them or write them down at your desk. Change them every one to three months.

Another issue is finding the resources to conduct a network security assessment that will show where you have gaps in your system technology and firewall. That service can be accessed through a variety of outside vendors.

The main focus is on the importance of cyber liability insurance. There are three main coverages associated with cyber liability: the cost of notifying customers after a data breach, the cost of replacing lost income for having your business interrupted, and the legal expenses and fines associated with court cases and lawsuits.

How can a company determine how much cyber liability insurance it needs?

The most common misconception is that a commercial general liability policy covers all of your cyber exposure. This is not the case. There are tools now that insurance companies provide for assessing your exposure. Research has shown that the average cost of a record being breached could be up to $200 per record, depending on the size of the breach and the type of data. Discuss this with your insurance agent or your broker. That’s the first step in figuring out how much you need.

What should businesses do to prepare for a possible data breach?

Developing an incident response plan for who’s going to do what and how to notify stakeholders if a breach occurs is a proactive step that will make this exposure a little less invasive.

Come up with a team and figure out the roles. Who’s going to contact our stakeholders, who’s going to contact our insurance agent to file a claim, and who’s going to contact our IT professionals to find out the scope of the breach and figure out how to stop it?

Jayce Stewart, MBA, is a Commercial Risk Consultant at RiskSOURCE Clark-Theders. Reach him at (513) 644-1272 or jstewart@risksource.com.

Insights Business Insurance is brought to you by RiskSOURCE® Clark-Theders

Fleet tracking and management, if correctly implemented, can provide a business with a number of procedural, safety and cost efficiencies, says Noah Goodwin, CPCU, a commercial risk manager at RiskSOURCE® Clark-Theders

“Fleet management can improve driving safety habits, which can reduce auto and workers’ compensation claims, and subsequently lower insurance costs. Morale can also be improved through increased safety,” Goodwin says. “Fleet tracking can help reduce fuel costs by increasing route efficiency, reducing idling time and impermissible usage.”

Smart Business spoke with Goodwin about how to effectively manage your fleet.

What exactly is fleet tracking, and how does it work?

The industry term for fleet tracking is vehicle telematics. In most cases, the system plugs in to your vehicles’ computers and provides a company with real-time data regarding each vehicle’s usage. Not only does it provide satellite vehicle positioning, but also it can provide instant notices for excessive acceleration or braking, or if someone is speeding. The GPS system will route the drivers in the most efficient manner and alert the company — the owner of the company or whoever is deemed responsible for the system — if its drivers are going out of the acceptable routes. You can identify which alerts you want to receive and set the threshold limits. 

If you have a driver who tends to drive too fast or brake too hard, you can require additional training for that driver. If the poor habits continue, you could move him or her into a nondriving position.

Illustrating the effectiveness of such a system, a company installed vehicle telematics in its fleet and discovered one of its senior operators was 20 miles away from the job site where he was supposed to be. It turned out he was doing a side job with the company’s equipment and vehicles. Making employees aware of your ability to monitor their use of company vehicles can prevent this sort of behavior.

What are the keys for effective fleet management?

While it’s important to have a written program, the key is enforcement. Many companies will develop the program and not enforce it. By not enforcing the program you are incurring costs without realizing the potential benefits. 

It can also get sticky in a couple areas. First, for human resources purposes, if you don’t follow the disciplinary procedures for one person but try to enforce them for another, you’re going to have a lawsuit. You need to be consistent.

Second, if your procedures say a driver who gets two speeding tickets within three years must be moved to a nondriving position, but you let that driver back on the road and he or she has an accident in a company vehicle that results in someone’s death, the company is going to be held liable. That’s not going to look favorable for your company in the eyes of a jury because the driver shouldn’t have been on the road per the company’s own procedures.

What are some common fleet management mistakes? 

One persistent fleet management mistake is not following a maintenance program. If a vehicle isn’t being maintained properly, it’s more prone to loss. Without good brakes or tread on the tires, there’s an increased likelihood a driver could rear-end another vehicle.

Personal usage of company vehicles is a problem area because many contractors have a truck that is their main mode of transportation. Insurance rates and job bidding are based in part on how far your employees drive every day. Allowing extra driving increases your fuel and maintenance costs, as well as your liability exposure.

Prescreen drivers before you hire them. It costs just a few dollars to run a motor vehicle report, but it’s not always done prior to hiring. If you’ve hired a driver then find out he or she doesn’t have an acceptable driving record, you may need to find the person a different job in your organization or terminate his or her employment.

Noah Goodwin, CPCU, is a commercial risk manager at RiskSOURCE® Clark-Theders. Reach him at (513) 779-2800 or ngoodwin@ctia.com.

Insights Business Insurance is brought to you by RiskSOURCE® Clark-Theders

 

 

There are market cycles in every industry, and insurance is no exception. But you don’t have to just take what the market brings you. Jonathan Theders, president of Clark-Theders Insurance Agency Inc., says the market cycle is only half of the pricing equation.

“You can’t control the market itself — storms are going to occur, natural disasters are going to cause pricing to change,” Theders says. “You have to focus on what you can do to differentiate your business and make yourself stand out.”

Smart Business spoke with Theders about how to position your business for success in the hardening insurance market.

How is the insurance market cycle determined?

There are two types of markets — soft and hard. In a soft market, premiums are stable or decreasing, and insurance is readily available. There is a lot of competition.

A hard market is the converse to that. Pricing goes up, it’s harder to find coverage, there are fewer competitors in the marketplace and there is an increase in claim activity across the board.

Economic downturns, natural disasters, and supply and demand all determine whether a market will be hard or soft.

Pricing cycles differ across the U.S. They are based geographically and also by type of coverage. For example, cyber liability used to be very expensive, but it’s gotten more competitive because there is more supply out there. You’re adding more competitors and it’s driving down the cost. You can see the converse of that in the workers’ compensation arena. You’re seeing higher than normal claim frequency. The result is increased pricing in that area across the board.

How can businesses control these costs?

Instituting safety prevention programs, managing your claims efficiently and employing various cost containment strategies can control these price fluctuations.

Look for ways to show how you stand out from the rest of your industry. You do that with a consultative approach. That involves not just looking at how you buy insurance, but also spending time identifying exposures you have to loss, finding solutions, and improving your disaster response and contingency plan.

Focus on building a culture of safety, constantly seeking continuous improvement. If you approach it like long-term cost control instead of just riding these cycles, you’re always in a better position to secure your coverage at the best price. Don’t let the market cycle dictate you. Dictate your own cycle based on what you’re doing.

Why is it important to dictate your own cycle?

When pricing decreases and you don’t have to work hard to get insurance, businesses are often unwilling to spend resources on risk management and loss control. They see insurance costs dropping, so they don’t understand the need to spend resources on something that is already under control. But that reduction in price during a soft market is setting that business up for a huge shock when the market changes, because it is not doing what it takes to differentiate and increase its risk profile.

Your risk profile encompasses your specific industry, issues, your building and the way it’s protected or not, and your policies and procedures. If you focus on risk profile improvement, you improve the way you look to an underwriter.

Then, take it one more step: Communicate all the things you’re doing. That guarantees a differentiation in the marketplace. A lot of companies do great things safety-wise. Very few are good at communicating those things to their insurance carrier. They may be doing great things already, but nobody knows about them.

Jonathan Theders is the president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or jtheders@ctia.com.

Insights Business Insurance is brought to you by Clark-Theders Insurance Agency Inc.

Family businesses typically enjoy employee loyalty and deep-seated pride because the family and the business are one and the same. However, with those advantages come certain risks.

“I tell people often, family business is the best and the worst form of business,” says Jonathan Theders, president of Clark-Theders Insurance Agency Inc. “You’ll do anything for family. It’s always amazing to me how family businesses aren’t run like typical businesses.”

Theders says 90 percent of the businesses in the U.S. are family businesses — a massive segment of the economy.

Smart Business spoke with Theders about the unique risks these businesses face and how to mitigate them.

What unique risks do family businesses have to consider?

One is an informal or complete lack of company policies or business plans. You should document your responsibilities and expectations for each family member in a family charter, but it is rarely done. It might be called an employee handbook in a typical business. If someone doesn’t perform in a regular business, you remove him or her, but it’s hard to do that with a family member.

At the end of the day in a typical business, the employees go home. But you can’t always separate the family business from the family. On holidays or birthdays, it is still business. You also know more of what’s going on in their personal lives than you would know with regular employees, which can pose challenges.

The majority of a family’s assets are tied up in the family business. Everything links to it, and it’s the source of all good and frustration. Divorce, illness and financial hardship normally create productivity issues for employees, but in a family business, it’s more complicated. You have to consider who owns shares of the company and the valuation of those shares. Maybe the business was worth $100,000 when the founder got married, but now it is worth $1 million and a soon-to-be ex-spouse is entitled to half of it. Where is that half million coming from? It’s probably coming from the sale of the business because the founder doesn’t have half a million in cash to pay off the divorced spouse.

If you have HR policies and procedures for general staff for sick days, absenteeism, behavior and dress and a family member is not adhering to those same standards, it also creates problems.

How do you handle special treatment concerns?

You have to be extremely cognizant of how you treat and compensate family and non-family employees. Make sure you are consistently selecting the most qualified individuals to fill roles in the company. This is a huge problem, because most of the time companies fill holes with family members that are not performing as well and other employees subsidize that. Take the family aspect out of it, and it could be easier to have the right people on the right seat on the bus.

How can you mitigate the risk of unhappy employees who are also family members?

If a normal business’s goals don’t match up with an employee’s personal goals, that employee can find a new job. It’s not as easy in a family business. It’s difficult to tell a parent you’re leaving or tell a child, ‘You’re not right for the business.’

That added family dynamic makes failure much more intense, and why it’s important to devise a plan that balances the family goals and business goals. For example, one family business had 70 employees; 36 were family members. The matriarch mom believed everybody with the same last name should be compensated equally whether they were pushing a broom or the president of company. That causes major problems when you have such differences in roles and responsibilities and abilities. Everybody wants mom’s wish to be true, but it doesn’t make good business sense.

How can you stop family conflicts from bleeding over into the business?

The adage ‘Leave your personal problems at the door’ doesn’t apply in a family business. It’s too difficult to separate family and business conflicts.

There’s a lot of sibling, and even cousin, rivalry. You grew up fighting for the last piece of chicken or the last point on the basketball court, and it continues on when you come into the business.

It’s unrealistic to believe that all family conflict can be removed from business, but you have to work harder at establishing those boundaries. Understand the potential family conflicts that can come up and try to address them ahead of time.

Family decisions are often extremely emotional and irrational. One recommendation is family council meetings that encourage members to get together and talk about where the business is, estate planning and other long-term issues. A third-party moderator often needs to be involved because it is so emotional. Another way is involve your board of directors or advisers, which brings an objective view to company performance and future strategy.

How are the transition risks different in family businesses?

The failure rate of businesses moving to the second generation is very high. Statistics show that 85 percent of family businesses don’t make it to the third generation. That’s often because the first generation has trouble letting go or hasn’t prepared the second generation to take it to the next level.

Often, family business owners do not have succession plans or an exit strategy. At 70 or 80 years old their entire personality, their every breath is related to the company; they’ve put 40 to 50 years in, through hard times and good times. They don’t know how to get out, but they are not the ones to lead it into the future.

Jonathan Theders is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or jtheders@ctia.com.

Insights Business Insurance is brought to you by Clark-Theders Insurance Agency Inc.

The Patient Protection and Affordable Care Act is well named, as its aim is to make health care providers accountable for delivering better care. As a result, the reforms make skilled health care risk management even more vital.

“The Patient Protection and Affordable Care Act has initiated a fundamental shift in the manner in which health care providers are going to be paid,” says Ron Calhoun, managing director and national health care practice leader with Aon Risk Solutions. “We are beginning a transition from volume-based methodologies to outcome-based methodologies. Prior to this, we have been on a fee-for-service model, as health care providers were compensated for volume.”

Smart Business spoke with Calhoun about how risk management integrates with health care in an age of reform.

What effect is health care reform having on the health care delivery system?

One of the consequences is that reform is creating the need for delivery systems to more fully integrate and provide a broader continuum of services. To take a bundled reimbursement, as opposed to the old pay-for-volume model, health care providers will be compensated based on outcomes. That creates a need for them to more fully integrate. On the front end, they will need to build out their ambulatory capabilities, and on the back end, they will need to improve post-acute capabilities.

How will the shift to outcome-based compensation affect providers?

The Centers for Medicare and Medicaid Services has implemented a compensation mechanism called the value-based purchasing program for providers to measure quality. There are 12 clinical process measures and nine patient experience measures. This program, which took effect in fiscal year 2013, is about 70 percent weighed toward the 12 clinical processes and about 30 percent weighed toward the nine patient experience measures.

If health care providers have Medicare or Medicaid reimbursements in 2013, they can participate in this program. Then, those measures will have a real impact on their reimbursement thresholds. The measurements, plus the overall shift away from volume toward getting paid for outcomes, makes risk management programs even more critical than their historical place in patient safety.

How can a risk management program help with those measures?

Nationally, our health care delivery system does not have a standardized, systemic quality measuring process. When The Institute of Medicine issued its 1999 report, ‘To Err is Human,’ it started the patient safety movement.

Risk management has been proactive in patient safety since 1999, but we still have negative outcomes in our health care delivery service. After a six-year decline, we are starting to see an increase in the frequency of health care professional liability claims.

What factors affect the frequency and severity of health care liability claims?

From 2000 to 2006, there was a decrease in the frequency of health care professional liability claims, driven by three factors. One was the proliferation of tort reform. Second, there was an investment in patient safety systems at the provider level. Third, the provider community did a good job managing the perception of there being an availability-of-care crisis because of malpractice costs. Those have contributed to a downward pressure on health care professional liability claims.

From 2007 to the present day, there have been continued investments in patient safety initiatives, but we are seeing an increase in claims because of two factors. The first is tort reform erosion. In some states, tort reform bills have been either reformed or weakened. The second factor is economic stress.

There is an interesting correlation between the unemployment rate and an increase in health care professional liability and medical malpractice claims frequency. For every 1 percent increase in the unemployment rate, there is a corresponding 0.3 percent increase in health care professional liability and medical malpractice claims frequency, with a three-year lag. We are starting to see the post-2007 unemployment rate as a contributing factor to increasing claims frequency.

Unlike claims frequency, claim severity has increased at a steady rate, 4 percent over the past six years. That is cause for concern.

What can be done to improve outcomes and reduce medical claims?

One of the biggest barriers to improving risk management and patient safety is the ability to measure outcomes and the speed with which outcomes can be measured. One feature of the Patient Protection and Affordable Care Act is providing financial incentives to hospitals and physicians to further the meaningful use of electronic medical records (EMRs). The proliferation is dramatic, but it is still a fractured business.

There are three levels of sophistication in EMRs. The first level is simply making a paper file electronic. The second is computerized physician order entry, or CPOE. The third and most complex level is platforms with clinical decision support data. That third level will be necessary going forward to drive down the incidence of preventable medical errors.

More sophisticated EMRs will improve outcomes because physicians will have clinical decision support to help them adhere to clinical protocols at their fingertips. This is important because one of the biggest variables for integrated delivery systems to manage as they make the shift from volume-based to outcome-based methodologies is their ability to narrow physician practice pattern variation.

This technology comes with liabilities. If physicians have clinical decision support at their fingertips and depart from protocols, and an adverse event occurs, these errors could have a greater financial consequence than in the absence of such technology.

Ron Calhoun is managing director and national health care practice leader with Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.

“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.

Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.

What are the differences between SBA loans and conventional loans?

The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:

  • Insufficient collateral

  • A startup business or one that’s only been in existence for a short period of time

  • The company is looking for a longer term on its owner-occupied commercial real estate purchase

  • The borrower is in a ‘high-risk’ industry

  • The borrower only wants to inject a minimum down payment

  • Impending or current ownership changes with the business

  • Inconsistent financial performance over the past few years

How does a lender determine if an industry is high risk?

It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.

However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.

What can SBA loans be used for?

SBA loans can be used to:

  • Purchase owner-occupied commercial real estate

  • Buy out a business partner

  • Buy a business

  • Purchase machinery and equipment

  • Buy a franchise

  • Construct a building (the business must occupy 60 percent of the space)

  • Cover working capital needs

  • Refinance existing business debt

What types of businesses are eligible for SBA loans?

To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.

What are the required size standards?

The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees, maximum revenue amount or an alternative size standard to qualify as a small business.

How is ‘good character’ determined?

First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.

Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.

The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.

Why might a business opt for an SBA loan instead of a conventional loan?

Businesses might opt for an SBA loan versus a conventional loan if they:

  • Want a longer term on their owner-occupied commercial real estate or equipment loan

  • Want a straight term and amortization versus a balloon note

  • Prefer a lower down payment on their transaction

  • Have a collateral shortfall

  • Want to consolidate business debt into one loan that could offer a longer repayment period

  • Want to buy out their business partner with a minimum equity injection

  • Want to purchase a business but there’s insufficient collateral

  • Desire cash flow savings due to a longer term and amortization

How can businesses get started with the loan process?

If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.

Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.

 

Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or romona.davis@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Most businesses want the same thing when it comes to their phone system: quality phones, reliable service and helpful features, designed with flexibility in mind and fitting neatly within their budget.

To achieve those things, some companies are letting their service provider do the heavy lifting. A hosted IP private branch exchange (PBX) solution integrates multiple locations in a feature-rich package, while eliminating the upfront costs that often make businesses reluctant to upgrade.

“The premise behind hosted IP PBX is that your company will run its phones off the hosting company’s switch — a large, expensive piece of equipment that you are sharing with a bunch of other companies,” says John Putnam, national sales director for PowerNet Global. “The only equipment in your building is the phone handsets themselves.”

Smart Business spoke with Putnam about the advantages of switching to a hosted phone system and how to determine if doing so could help your company.

Why are companies moving to a hosted IP solution?

It comes down to a couple of different reasons. Obviously, financial reasons play a major part, but also, companies are looking for features that allow them to run their business better.

Many organizations upgraded their phone systems for the year 2000. Those systems don’t have the features and capabilities that companies want, but the capital expenditure of buying a new system in today’s economy makes them uncomfortable.

However, if they choose a hosted solution, the capital expenditure is much less because they are running their system off the hosting company’s phone switch. With some of the handset leasing programs available, companies can get by without a large capital expenditure up front.

What types of features are available?

Aside from financial concerns, many companies decide to switch to a hosted solution because they want features their current system is unable to provide, such as caller ID, individual voice mail for everyone in the company and the ability to forward calls to cell phones. If your phone system is missing these features, but you don’t want to write a check for $30,000 to $60,000 for a new phone system, a hosted solution is ideal. Even for smaller companies, a $5,000 capital expenditure for a new phone system is daunting given the uncertainties in today’s economy.

Now those features are available without a huge upfront capital expenditure. For a small business with 10 handsets, you may be looking at $60 a month versus a $5,000 to $10,000 capital expenditure.

What are the benefits of integrating multiple sites through hosted telephony?

Multisite companies with premise-based PBX systems have to maintain, upgrade and support those systems at each site. Sending someone out to make the necessary changes to each system is costly and is not the most effective use of resources. With a hosted solution, companies can make a change at one location to update the phone systems at each of their sites, reducing their continuing cost. Each phone handset is running off the hosting company’s equipment, so they are all integrated.

That allows you to treat the customer in a different manner. For example, if a customer calls one store and it doesn’t have the item he or she is looking for in stock, the hosted system can transfer the customer to another store without requiring that person to call another number. If someone at one store doesn’t answer, the system can automatically dial another store. If a store needs to transfer a customer back to the corporate headquarters for centralized billing functions, the customer is transferred, not called back from a different number.

What are the other advantages of using a VoIP system for telecommunications?

Typically, if you are using VoIP technology, there is a lower cost for the service itself. Companies can take advantage of VoIP services that are normally less expensive than traditional services. The cost per line is lower, the cost for long distance is lower and the continuing costs are lower. And because it is an IT-based solution, if you call from one store to another, there is no long distance involved at all. A Milwaukee store calls a Chicago store, and because all phones are on the same switch, that is now a zero-cost call.

For what type of companies does this strategy makes sense?

Smaller businesses, the three to 20 handset market, have been the early adopters. Now, larger corporations are adopting this strategy, as well, as this technology is particularly well suited for large companies with 200 small sites. These enterprise clients have recognized that they aren’t necessarily an enterprise; they are a bunch of small businesses.

For example, if a business has 1,000 sites and each of those sites has five to 10 phones, this strategy becomes very attractive. It looks like an enterprise play, but, in fact, it’s a small business play multiplied a thousand times.

What kind of results can companies expect from a switch to a hosted IP phone solution?

A number of clients have been able to take advantage of a new phone solution for either the same price or less than they were paying for service before. So, in essence, it is a free service, because if you paid $500 for service before and save enough on the service that, when taken in conjunction with the handset leasing program, your total spending is about the same as it was before. However, you’re getting all these new features and capabilities with the service.

John Putnam is national sales director for PowerNet Global. Reach him at (866) 764-7329 or pngsales@pngmail.com.

Insights Technology is brought to you by PowerNet Global

Saturday, 01 September 2012 15:50

How to escape commoditization

When Jonathan Theders, president of Clark-Theders Insurance Agency Inc., needed a new cell phone but didn’t have the time to drive 45 minutes to the nearest Verizon store that had it in stock, a Verizon employee offered to do it for him.

That salesperson recognized a problem and found a solution that created a lifelong customer.

“I’ve certainly become an advocate for them, which is what you ultimately want your customers to become — those raving fans, those people who spread your selling proposition, who you are and why you’re different,” Theders says. “If you follow the model of identifying an unrecognized problem and delivering an unanticipated solution, you will create raving fans. And they will become your most cost-effective salespeople in delivering referrals to you.”

Smart Business spoke with Theders about three traps businesses run into when failing to differentiate themselves and how to escape commoditization.

What stops businesses from successfully differentiating themselves from competitors?

The three basic traps that every business runs into are the commodity trap, the perception trap and the anxiety trap.

The commodity trap is when there is no recognizable difference between two brands other than price. Businesses like to separate themselves from their competitors with customer service or value-added products, but a lot of times, people don’t understand that difference. The value-added services a company provides are very likely the same ones their competitors are providing. Then it gets down to price again.

Some successful businesses consider their product or service to be a commodity. Think of online retailers that have no personal relationship with their customers; their strategy is to sell in volume, with lower margins to get the price as low as possible and hit their targets through quantity.

When you’re trying to compete with companies using that type of model, you have to come up with a differentiating connection with your customer because if you’re in the commodity trap, why wouldn’t you select based solely on price? If I can buy the exact same product 20 percent cheaper online, why would I not? You need to position yourself so that you can leverage your unique qualities or create unique qualities that allow you to stand out from the competition.

How can businesses escape the commodity trap?

There are two things businesses must do to get out of the commodity trap: Identify an unrecognized problem that the customer or potential new client did not realize it had, and then, in turn, present it with an unanticipated solution. If you’re going to live outside the commodity world, you must do these two things.

Copier paper is a good example. We all need it but it isn’t so drastically important that you have a particular brand. It is easy to obtain and there are a lot of vendors that can supply it. That is an item that you would shop — it’s in that commodity trap area.

But if a copier paper company told you its paper jams 80 percent less than a competitor’s paper, it could change your view on the product as a commodity because there is a solution for a problem that you can’t find one for — if it delivers on that promise.

Things that have the perception of being easily commoditized can still be differentiated in the marketplace based upon delivering that model of recognizing a problem and providing a solution the customer wasn’t anticipating.

What is the perception trap?

The perception trap is the perception that people believe they already know everything about your company before they hear the story. People automatically think they know your business, and it already has a connotation for them. It could be a lawyer, accountant, or someone who manufactures widgets — the prospective customer has a pre-existing perception of each of them.

You have to recognize what that perception is and create bridges to get over that if you’re going to differentiate yourself.

How can you overcome someone’s perception of your company?

You get past perception through addressing three things. I call it I3: issues, implications and interventions. First, identify your clients’ issues. Then allow them to understand the implications of those issues. Finally, have an intervention that ties into delivering an unanticipated solution.

If you can deliver on I3, you can bridge any perception issues that exist. Then people will look to you as a trusted adviser rather than as a supplier of a good or a service.

What is the anxiety trap, and how can businesses avoid it?

The anxiety trap is nothing more than the fear of standing out from the crowd, of thinking, ‘This is what everybody else does and it’s safe.’ Everyone, at some level, has fear and anxiety regarding change. When you realize that different people in an organization will have different levels of that anxiety, you have to address it, and you do that through communication.

Give people comfort. It’s not easy, changing and trying to stand out as the copier paper that is different from just the price-driven model. It’s fearful to put yourself out there and try to differentiate yourself. Recognizing that, understanding it and being able to communicate around it will allow you to stand out.

Jonathan Theders is president of Clark-Theders Insurance Agency Inc. Reach him at (513) 779-2800 or jtheders@ctia.com.

Insights Business Insurance is brought to you by Clark Theders Insurance Agency Inc.

Rick Miller, Managing Director, National Property Practice, Aon Risk Solutions

After the hit insurance companies took in 2011, businesses are continuing to experience changes in the property market in 2012.

“Companies can expect modest upward rate pressure due to severe global property losses back in 2011,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”

Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.

Smart Business spoke with Miller about what is happening in the property market and what new developments companies should expect to see this year.

What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?

Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm, and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.

The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.

Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.

The 2012 Atlantic Hurricane forecast is for lower-than-normal tropical storm activity.

What is behind the firming market?

The biggest drivers behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011. Year-to-date losses in 2012 have been low compared to 2011.

The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been, at best, flat, following a few years of a slow economy. Strong supply and lagging demand have maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.

How quickly will these changes occur?

We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective, or those that have had losses, have already seen pricing pressure.

Most natural catastrophe property business renews in the first two quarters of the year, as these buyers do not want to be in negotiations during hurricane season June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.

The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.

Accounts renewing in the first two quarters of 2012 experienced slightly more upward rate pressure than what was seen in 2011. The increase for most accounts was less than up 10 percent on rate. Some accounts that renewed in May or June had already experienced increased rates when they renewed last year and that reflected in less upward pressure than accounts that renewed in the Q1  and early Q2 of 2012. Absent a significant loss event such as a land-falling hurricane or earthquake in 2012, we expect rates will moderate and increased competition will return in 2013.

How will new developments affect limits, deductibles and coverage?

As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).

What new products and services have been developed for the property market, and how can these benefit companies?

Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.

The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.

Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or richard.miller@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

After the hit insurance companies took in 2011, businesses are continuing to experience changes in the property market in 2012.

“Companies can expect modest upward rate pressure due to severe global property losses back in 2011,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”

Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.

Smart Business spoke with Miller about what is happening in the property market and what new developments companies should expect to see this year.

What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?

Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm, and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.

The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.

Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.

The 2012 Atlantic Hurricane forecast is for lower-than-normal tropical storm activity.

What is behind the firming market?

The biggest drivers behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011. Year-to-date losses in 2012 have been low compared to 2011.

The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been, at best, flat, following a few years of a slow economy. Strong supply and lagging demand have maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.

How quickly will these changes occur?

We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective, or those that have had losses, have already seen pricing pressure.

Most natural catastrophe property business renews in the first two quarters of the year, as these buyers do not want to be in negotiations during hurricane season June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.

The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.

Accounts renewing in the first two quarters of 2012 experienced slightly more upward rate pressure than what was seen in 2011. The increase for most accounts was less than up 10 percent on rate. Some accounts that renewed in May or June had already experienced increased rates when they renewed last year and that reflected in less upward pressure than accounts that renewed in the Q1  and early Q2 of 2012. Absent a significant loss event such as a land-falling hurricane or earthquake in 2012, we expect rates will moderate and increased competition will return in 2013.

How will new developments affect limits, deductibles and coverage?

As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).

What new products and services have been developed for the property market, and how can these benefit companies?

Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.

The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.

Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or richard.miller@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

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