SMARTER INSURANCE SHOPPING
Cheaper premiums are ripe for the picking, and increasing numbers of companies are switching insurance carriers. Will Asia’s CFOs get a fair deal?
By David M Katz

Changing insurance carriers isn’t a decision most CFOs can breeze through. In a market that continues to soften, many companies can save money by switching insurers, but in doing so they can also ensnarl their borrowing resources and tie up their risk managers. For CFOs operating in Asia, particularly in smaller companies where a decision to change insurers is often based solely on price, potential snafus emerging from a switch warrant careful scrutiny.

A company that buys a policy including hefty amounts of self-funding, for instance, might face demands from the new insurer for more collateral to cover the buyer’s part
of the risk; the newly required letter of credit could consume a bigger chunk of the company’s credit line. Making a change could also consume hundreds of staff hours assembling internal data for presentations to carriers. “CFOs here and everywhere are looking for the best of everything, the cheapest price, the best coverage, and the all around best deal,” says Jon Bitcheno, head of ASEAN and specialty practices for Marsh, the US insurance broker and one of the world’s largest. He adds: “What keeps them awake at night is the nagging question, ‘Have I paid too much?’ But also, ‘Have I covered all the things that I need to cover? Will the company have got the right coverage when claims occur? Have I given a full explanation to the board about the [D&O] coverage they’ve got?’”

Those worries aside, they are moving, in substantially greater numbers. In a recent survey of about 2,000 businesses and government entities in the US, Marsh found that nearly one in four switched their workers’ compensation, general liability, or commercial auto liability insurer last year – far more than the one in seven that changed insurers in 2003.

Arguably, price competition has a lot to do with it. Many US companies that renewed their casualty programs on July 1 enjoyed a “notable downward tick” in pricing, often to the tune of 5 to 10%, according to Timothy Brady, a managing director with the US casualty practice of Marsh.

Indeed, prices in the property/casualty market overall have been dipping. During the second quarter, premiums for the average commercial p/c account dropped by 9.7%, according to a survey sponsored by the Council of Insurance Agents & Brokers of 131 commercial insurance brokers. By size of account, the price cuts were across the board – an average 5.6% decrease for what the brokers considered their small accounts, 11.4% for mid-sized clients, and 12% for the large employers. Marsh’s Bitcheno reckons that premiums have dropped between 15 and 25% in the last two years globally.

Companies didn’t necessarily have to shift insurers to trim their premiums (although the threat that many companies might be making a move undoubtedly lowered prices). Very likely, many corporate insurance buyers received lower rates from their incumbent providers. Other companies are pursuing a mixed strategy: soldiering on with some carriers but switching away from others.

The latter approach saved Shaklee – a US provider of nutritional supplements and a subsidiary of Japan-based Shaklee Global Group – 10% at its May 27 insurance renewal, according to Karen Beier, vice president of risk management for Shaklee in the US. The company dropped its Bermuda-based umbrella-liability carriers for Asian and European insurers, enabling it to parlay Shaklee Global’s relationships with Japanese insurance companies, according to Beier. Shaklee of the US also got better-than-market rates from its longtime primary product-liability carrier, Chubb Insurance Group. In a series of face-to-face meetings with underwriters, Beier strove to distinguish the company’s risks from those faced by other makers of nutritional supplements. Product liability is the company’s toughest peril to insure, notes Beier, in part because of the negative publicity surrounding products such as those including ephedra, which her company doesn’t distribute.

Deciding When to Make a Change

Should a company stay with its current carriers, or should it go? As the choice may involve the movement of hefty amounts of money and corporate risk, it should be based on a thorough analysis of the company’s needs and the insurance markets available to meet them. The core of that analysis should be a comparison between what the company pays for insurance and what its peers pay. Before buyers shop around, their first question should be, “Is the program fairly priced?” says Brady.

To benchmark, however, you need a common basis of comparison. Many risk managers try to find that in “cost of risk”. To Marsh, this equals the sum of insurance premiums (what it calls “fixed” costs) and the projected value of self-insured losses and claims-handling expenses related to the losses (what it calls “variable” costs), per US$1,000 of revenue. The authors of the Marsh study found an average overall casualty cost of risk of US$2.56 last year for its survey sample, including an average of US$1.64 in workers’ compensation costs, 58 US cents for general liability, and 34 US cents for auto liability.

Looking at the entire cost of risk, rather than just insurance premiums, is essential in gauging whether an insurer is charging a fair price, according to Brady. That’s because premiums tend to make up only 20 to 30% of corporate casualty risk costs; self-funding accounts for the rest. Brady notes that if a carrier quotes a 20% premium cut, that’s just “20% of 20%,” so it’s also important to consider how well a carrier helps a company hold down costs on the risks it retains – for instance, by running efficient workers’ compensation medical networks and return-to-work programs.

Understandably, Marsh’s version of the metric focuses on buying insurance; what it omits is the investment a company makes in the management of its own risks. The Risk and Insurance Management Society and consulting firm Advisen try to capture that expense in their cost-of-risk calculations by including internal risk-management administrative expenses as well as the costs of premiums and self-insurance. Last year a RIMS/Advisen survey of about 1,000 corporate participants on the costs of property and casualty risks found a US$13.91 average cost of risk per US$1,000 of revenue.

Indeed, factoring in the costs of managing the risk management department can be revealing, says Advisen chief knowledge officer David Bradford, who suggests that “if your risk management department is overtaxed, it might take the easy way out.” Bradford observes that at a company that invests too little in the department, risk managers might, for instance, choose to buy insurance rather than take the less costly route of self-insuring, which would require more internal work.

The RIMS/Advisen metric does have its limits, Bradford acknowledges; it includes only the elements of “hazard” risks – exposures traditionally associated with the insurance industry – rather than broader business perils like investment and foreign-exchange risks that are more characteristic of enterprise-wide risk management. He expects his company to expand its measuring capabilities in that direction, however.

Considering the pliability of the cost-of-risk metric, how can risk managers and finance executives use it to see whether they’re getting a reasonable deal? “You really have to take into account your particular exposures,” says Shaklee’s Beier. “You have to do it on a piecemeal basis, and use a lot of different sources to get a more accurate reading for benchmarking.”

Sometimes it’s hard for a company even to find a category where it belongs. While Shaklee sells vitamins and health-food products, says Beier, categorizing it as a food or pharmaceutical company would put it in a group with greater risks than the company actually bears and “send costs into a higher range than our particular industry.” Instead, for benchmarking purposes Beier first looks to the “all” category in the RIMS/Advisen study, then gets more-specific information from her broker, Marsh, about the risk-retention levels, amounts of coverage, and pricing of her peers’ insurance programs.

Marsh’s Brady urges risk managers and finance executives to “not look for the obvious” when choosing a peer group to determine what their companies should be paying for insurance. For example, he knows of at least one telecoms company that has “tens of thousands of vehicles”; executives at such an organization might look to transportation companies as well as telecoms to determine whether they’re getting a fair price.

Making a Sensible Change in Asia

Marsh’s Bitcheno argues that Asian CFOs in particular need to adopt a comprehensive view of their insurance needs, rather than concentrating solely on price. The market, he says, “is young in terms of insurance buyers. A lot of clients are still not sure, and look at insurance as a commodity.”

Checking up on the financial strength of your company’s insurer is crucial. “Clients might think twice about changing. Why would a triple-A corporate client select an insurance provider that has B-minus or C rating?” says Bitcheno. Even when a carrier hasn’t reached the point of outright insolvency, lack of financial resources can mean that it invests little in claims handling. For many workers’ comp policies, that can mean higher medical and legal bills for the employer.

Bitcheno also warns that it’s important for prospective clients to examine the expertise of a given insurer before changing. CFOs should ask: “Is it the right type of insurance, or is the provider buying a client’s business for that year to build a new portfolio and just to get that client on their books?”

Service, too, can be a major factor. Flaws in service can move a finance chief to jettison a carrier even if it charges a fair price. Among them, says Brady, are taking too long to respond to a claim or to provide coverage documents. One particular deal-breaker is “starting with a high price and then negotiating downward” when other insurers provide competition, he adds. “CFOs don’t like that.”

Niles Lo in Hong Kong contributed to this story.