5 minute read
Business Intel
Appetite for Risk
How baking companies can avoid biting off more insurance costs than they can chew.
BY JOE BUICK, OSWALD COMPANIES
At the root of the commercial baking industry is the widely shared belief that almost everyone has a healthy appetite for an amazing cake, warm bread or a good old-fashioned chocolate chip cookie. Certainly, those within the industry have a passionate interest in their products and the customers who crave them.
But when it comes business-essential topics like insurance — and the commercial risks that make it an important part of a bakery’s bottom line — a baker’s appetite is not so hearty.
While the task of reviewing insurance needs can often be seen as necessary but unpleasant, it doesn’t have to be that way. Rather than being seen as a “sales” persona, an insurance broker could — or, perhaps, should — assume the role of an advisor with the primary goal of guiding insurance choices for a client to arrive at the best possible fit at the best possible rate.
But without proper guidance, many bakery professionals too often immediately scroll to the last page of an insurance proposal to focus only the premium. “What’s it going to cost me” is a natural first inclination. But the devil is, indeed, in the details. Insurance premiums are derived from exposures multiplied by a given rate. When considering the options, the most important decision is in considering how much you can afford to fund yourself. In effect, that’s the appetite for risk.
Part of this concept is self-explanatory: Choose a deductible that’s reasonable and that can be absorbed at the time of loss. However, a larger business can drive costs down with a loss-sensitive approach. Policies can be designed with large deductibles or self-insured retentions that result in ultimate savings.
One of the best examples lies in workers’ compensation insurance. Many businesses have been insured with “first dollar” coverage since their inception. Often, their premiums started at just a few thousand dollars per year but have grown to more than $250,000 for this coverage line alone.
As a business grows, the ability to absorb larger losses usually grows with it. With proper guidance, the opportunity to reduce the net rate should also increase. By managing claims internally and accepting a large deductible, for example, premium credits of up to 75% can be applied, depending on risk parameters and loss history. For companies with a strong safety culture and years of experience including hard loss data, coverage adjustments can accommodate that changing appetite for risk to drive bottom-line savings.
Expanding companies with a larger appetite for risk can also realize cost savings by reexamining their commercial property insurance. Many underwriters have the ability to apply a (per location) loss limit, so for businesses with significant geographic spread across multiple locations, this could be an option worth exploring.
Consider a company with five locations and a Total Insured Value (TIV) per location of $20 million. The combined total insured value for all locations would be $100 million, and the company would normally carry blanket coverage of $100 million to fully cover their total risk. This blanket limit would be rated based on the fact that simultaneous total loss is unlikely.
However, the company would indeed pay an insurance premium based on the entirety of this value. Assuming the insured is confident that simultaneous loss is unlikely as well, why not cap the per occurrence property loss limit at $20 million? It’s a method that is commonly used with multi-state or multi-region companies to reduce the total cost of risk.
The commonality and application of these examples has a direct correlation to how much risk a company is willing to take to reduce overall costs. The larger a company grows, the more latitude it has to consider such risk management techniques.
Ideally, each line of insurance coverage — including health benefits — can be approached in this same way. Sometimes, for no reason other than lack of a recent policy review, a buyer’s risk appetite can appear to vary greatly from one coverage area to the next. For instance, why else would a business self-insure the first $100,000 of a workers’ compensation loss but keep their auto physical damage deductible at $1,000 if they average fewer than three accidents per year? These inconsistencies develop over time, but if reviewed annually to match a business’ overall appetite for risk, savings can be achieved.
In risk management circles, there’s an expression: “They’re outgrowing their agent or broker.” This is often true for large, risk-laden clients. The agency that is selling “cookie-cutter” products is an agency that normally does not design or have access to insurance programs that include loss-sensitive options. It’s important for a growing bakery business to consider the possible options.
Further, if a company is paying more than $500,000 for casualty lines (commercial auto, general liability and excess liability), it should be hearing about captive insurance options. Captives, in simple terms, are programs designed and paid for by members. Businesses that pursue a captive option are very interested in controlling and managing risk. They often have a higher appetite for it based on their culture and experience. Because of this, they can pay a lesser net rate as well as enjoy returns that reflect losses not incurred.
With insurance as a shield meant to protect a business’ balance sheet, baking companies should ensure their coverage is consistently designed across all lines or types. Measuring the appetite for risk is a great place to start the conversation with an insurance advisor, whether growing a business or launching one. CB
— Joe Buick, a certified insurance counselor and certified risk manager, has more than 25 years of experience in the commercial insurance industry. He and his wife, Rebecca, own D’Vine Cookies in Ferndale, MI. Contact him at jbuick@oswaldcompanies.com.
