In an age of economic austerity one of the ways that businesses can save money is to look hard at their insurance costs. This is an area which is often overlooked during times of success due to lack of time, understanding or expertise – sticking with the status quo can be the easiest option when your time is consumed servicing increasing sales. In quieter periods however many businesses have the chance to really look at the insurance cover that they need and the value for money that their insurance arrangements afford to them.
A recession can be a good time to carry out a root and branch review – not just because there might be cost savings to be made, but also to check that an insurance program still fits the needs of the business. Many businesses could save money by simply remarketing their insurance portfolio on an annual basis and this can seem to be an obvious course of action in a price comparison world, however there can also be a hidden price to pay in the medium term for what many insurers will see as a lack of loyalty.
Insurers will understand, and indeed expect, a certain degree of price benchmarking, however a business can do real damage to their insurance prospects by over marketing their portfolio. There is a fine balance to be struck between obtaining a fair price and excessive market exposure. The owner of a small to medium sized business, who does not have the luxury of a qualified insurance manager to advise them on their insurance requirements, can easily end not marketing their portfolio sufficiently or over marketing. The impact on the business of the former is easy to guess – the business ends up paying more for their insurance cover than they should, but what of the effects of over marketing?
In the short term over marketing can seem to have a positive impact on the business. Prices are driven down and the business pays less for its insurance cover. This does not necessarily have an impact on the quality of cover that the organisation buys, the effect appears to be on price only. In reality there is a hidden effect of over marketing and any short term price gain can be lost in the medium term. There is a quantifiable cost to Insurers for clients who shop around each year as opposed to those whose business they are able to retain for a period of time. To understand the value of loyalty it is important to understand how an insurer structures their premiums and how they achieve pay back on their investment.
The first thing to understand it that it is more expensive for an insurer to put on a piece of new business than it is to write a renewal. This is because when a new policy comes onto the books an insurer must take the time to take a detailed look at the proposal and put together a pricing strategy. At renewal the insurer is simply reviewing its previous decisions and looking to see if there are any major changes in the business that need to be factored into the rating structure. The time taken on a renewal is therefore significantly less than on a piece of new business and this provides an instant saving to insurers.
The other factor which reduces the cost of renewals over new business is that, providing the pricing strategy is right, an underwriter can expect the majority of the renewals to result in confirmed business (typically 90% or more), whereas new business quotes tend to have a much lower conversion ratio (typically 20 – 30%).
In many cases an insurer will not make any money in the first year that they hold a particular risk. It therefore makes economic sense for them to retain a piece of business over a period of time. It is in their interests therefore to work with clients who are prepared to be loyal and want a long term relationship with their insurance providers.
Insurers can and do become very frustrated by customers who they see marketing their business every year. The client who uses two or more brokers each year to bench mark their premiums is an even worse proposition. This can result in an insurer seeing the same piece of business several times over a short period of time. Insurers can and do remember what they have quoted on and to see a piece of business several times in quick succession sticks in their mind – particularly if they see the same piece of business several times each and every year without ever getting the business.
The affect of this over marketing is to end up with a hugely disaffected underwriting base. Quote requests will begin to be returned marked "no quote – annual marketing exercise". This can quickly reduce the number of markets prepared to look at a piece of business and as the supply base narrows so the actual price that the business pays for their insurance cover increases in the medium term.
The other effect of over marketing can be seen in the event of a claim. Every business that buys insurance does so in the certain knowledge that claims are something that happen to other people so this is not an area that need concern them, however claims do happen at some time or other to us all, whether we are at fault or not. If a claim at some point throws up an issue on which insurers have to take a view on whether the policy provides cover or not we will want the insurer to give our claim the benefit of the widest interpretation of the policy. There is no doubt that insurers are more inclined to take a generous view in cases where a client has been a long standing customer than in those cases where a client switches carriers each year.
Notwithstanding the above it is sensible and indeed healthy for a business to review and periodically remarket their insurance portfolio. There are ways and means of effectively marketing an insurance portfolio on a regular basis to ensure that the best price is obtained for the cover without causing disaffection with insurers. For an SME the most sensible solution is to use a broker, such as PI Expert, to manage this for you.
Your broker should work with you to firstly understand and then present your business effectively to insurers. The broker should use their expertise to narrow down the markets which are appropriate to your business. You should expect the broker to go to a number of markets on your behalf to get the best price for you, It is surprising how many brokers (including some of the largest players) only use a limited market for placing business – this might be just one or two insurers. Whilst limiting their market to a few players will result in higher commission for the broker it is unlikely to result in a better premium for your business.
When instructing a broker it is wise to take time to find out which markets they will use. Ideally use a whole of market broker. Brokers such as PI Expert are totally independent and will carry out a full market search. Ask also to see proof of alternative quotes.
Your broker should be reassessing your business every year. This does not necessarily mean that they should go to market every year to see if cover can be obtained more cheaply – in some cases this is counterproductive – the broker should use their knowledge of whether you are on good rate or not. You should however ask your broker what they plan to do with your renewal and ask them to justify their decision if they are only going to a limited market or not marketing your renewal at all. Be very suspicious of the broker who simply offers up the same insurer year on year with a small price increase each time.
You should test your broker out every now and again. Do not do this every year, because not only does it annoy insurers to see the same piece of business more than once, brokers also take a view on the client that goes to market every year too. If you are going to go out to market with another broker be sure to give your holding broker a chance to quote for your cover first – there is nothing more frustrating for a broker who has worked with a client over a period of time to find all of the markets that will quote have been blocked by an attacking broker prior to being given the chance to do the job properly for the client. A simple rule of thumb is to let your holding broker have a few days head start on the quote process before you ask an alternative broker to come up with a quote.
Be fair to all parties. If you have instructed an alternative broker to obtain competitive quotes for you be prepared to move your business. In common with many brokers PI Expert does not charge a fee for obtaining quotes and this can be a costly and time consuming job. It is only fair therefore for you to be prepared to move your business if the alternative broker is able to obtain significantly better terms. You will do your business no favours by sticking with a broker whose strategy is to allow another broker to do the hard work of obtaining the best price for your cover and then price matching the best deal you are able to obtain elsewhere. The broker who has done all of the hard work and not obtained your business is unlikely to want to try again the following year and there is no pressure on your holding broker to do more than offer up existing insurers terms.
Be claim aware. If you have had a claim during the year it is sensible to stay with your holding insurer at renewal. If there is a problem with the claim then insurers are more inclined to look favourably on it if you have shown loyalty to them at renewal. There is an unwritten understanding between insurers that expects policyholders to give the holding insurers at least some opportunity to make their money back after a claim has been paid out and many will take a dim view of an insured who tries to move their cover at the renewal which immediately follows a claim being made. This may affect your chances of obtaining a quote at all in the future.
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