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3 Things About Designing Business Insurance Programs

1. What Needs to Be Insured?

We are taught early on in our careers we should insure everything that is insurable. People are bombarded in the media about making sure they are protected. If something is valuable, then we need to insure it. Over time, I have learned this is not always the case.

As insurance professionals, we need to alter our focus 180 degrees! We should begin to focus the impact a claim or loss will have on the client. Bad things can and do happen every day. Many bad events happen without having any serious impact on businesses. They happen and managers adapt and handle the event and move on. For example, the retailer runs a sale on a specific piece of merchandise. They have spent money on advertising to get customers into the store on that day. Unfortunately, the merchandise does not arrive on time or not in the quantity the retailer needs. So, the retailer decides to either offer another brand or offer rainchecks so customers can still buy the merchandise at the same price on a later date. It was a bad event which happened, but the retailer was able to manage their operations to minimize or eliminate the impact of the event.

One question we should be answering is what can the insured recover from? We take on risk all the time without thinking about it. Like the example I just mentioned, we incur losses and recover from them all the time. The same principal can apply to property and casualty loss exposures too.

2. Has duplicate coverage been avoided?

Believe it or not, I often see duplicate coverage provided by various parts of commercial insurance programs. In one case, I found our client had been paying an additional $75,000 a year to purchase specialty coverage already included within our policies. Unfortunately, the condition had existed for quite some time.

More recently I was visiting a wholesale broker with a fellow underwriter. While explaining some of the programs our company offered through our MGA program, he spoke about providing property and general liability packages for a wide variety types of smaller risks. His pitch eventually turned to insuring moving companies. He explained they offered sub-limits for loading and unloading exposures. It took restraint to avoid jumping into the pitch to ask why that would be a selling point because what the general liability policy does not cover, the auto policy does. I began to think if we were charging for this extension, we were charging for coverage they would already have.

Both examples illustrate, duplicate coverage is often provided. Sometimes it is charged for and sometimes it is not. It happens with large national account and national brokerage houses as well as on small accounts with small agents. Spending dollars on duplicate insurance is not a cost-effective use of those insurance dollars in any case.

3. Have more cost-effective risk management techniques been considered?

There are many ways to handle risk and insurance is just one of them. It is my personal that it is the least efficient because it is squarely on the cost side of the equation. Purchasing insurance is a pure expense. It does not contribute to the bottom line. It does not change the fact insurance is a necessity and absolutely needs to be purchased at some level because most risk cannot be addressed through other means.

Having said that, I believe insurance professionals have spent far too little time discussing more positive risk management techniques our clients can use to manage risk. I believe too many times our preferred solution is to purchase more limit or lower deductibles. Let me explain.

The old saying, “an ounce of prevention is worth a pound of cure,” still rings in my ears. There are many ways to deal with most risks to minimize the purchase of insurance. I do not think we talk enough about pre-planning. I am reminded about one situation where a major company planned their way out of buying insurance. In this situation, the insured sold their own line of agricultural fertilizers and pesticides. They used contract manufacturers to manufacturer their proprietary blend of chemicals. They spread out the manufacturing of their products out amongst a variety of contract manufacturers. They also knew how close to capacity each supplier was. If they ever lost one of their suppliers, they could quickly and easily reallocate the lost production to another supplier without any loss. Thereby, they reduced the need to purchase contingent business income coverage.

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