Insurance Risk & Rising Premium Rates – Why, & What Can be Done to Change Them

Posted by The ALS Group on Feb 19, 2020 12:53:36 PM

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Three Questions for Managing Principal, Albert Sica, of The ALS Group

For the last 12-18 months commercial insurance rates have been rising and many business leaders are ill-equipped to either understand why or what they can do about it. Recently, this was captured in a good article in The Wall Street Journal and we thought we would explore this a bit more.

Business leaders often rely on a broker, whose primary role is to “sell” insurance to guide them through a complex mix of their company’s exposures, insurance policy language (including exclusions) and what can be done to, both, mitigate risk and the cost of coverage. Understanding the financial impact of a risk on a company’s balance sheet or earnings statement and what can be done to protect against that uncertainty is key to complex questions it is now essential to explore.

The ALS Group believes that, ideally, having somebody who is not influenced by “insurance sales” or has business relationships with insurance carriers is the way for Owners, COOs and CFOs to get the best guidance. Devising an appropriate Risk Management Blueprint to make sure the overall risk management structure of an organization is thought through and implemented the most effective way.

Three Questions for Managing Principal, Albert Sica, of The ALS Group

Founder and Managing Principal of The ALS Group, Albert Sica, answers three questions about why hiring an Independent Risk Management Consultant is important, and why insurance rates are on the rise in 2020.

Question 1: Why does an organization need an Independent Risk Management Consultant in 2020?

Albert: Break that title apart, and an independent consultant is somebody who doesn’t have a vested interest in the placement of coverage. Whether it be through fees from the insured, commissions, or some other means of getting paid by a party other than their client, independent consultant’s only interest is in being an advocate for the client. The moment that the concept of being independent is breached, you have a conflict of interest. That is one of the reasons why The ALS Group does not work for insurers, does not accept compensation from insurers or insurance brokers, and never accepts engagements with insurance brokers to avoid any conflict of interest – we are truly INDEPENDENT!   

The second part of differentiation between a “risk management consultant” and an “insurance consultant” is that ALS, as a Risk Management Consultant, considers many of the “non-insurance” risks and mitigation strategies a client should keep in mind as part of the Risk Management Blueprint. A risk management consultant is going to look at a company’s operations in terms broader than just their insurance risk or insurance coverage. A client needs help, advice and guidance across their business model and having a risk management consultant allows company’s leadership to understand and view a broader scope.

Question 2: It was recently reported that business insurance rates have been on the rise, do you find this to be true and why?

Albert: Yes. I think, predominately, it is the result of the interest rates being low, and catastrophic events that are more difficult to predict. I believe what is happening is that some of the predictors of the timing of a catastrophic event would happen are no longer as credible as they used to be. They used to predict that an event like Superstorm Sandy would only happen once in in 500 years.  It’s not the case anymore, and we are going to get more and more catastrophic events for which people can’t plan.

Most insurers have a complex reinsurance structure where an insurance company, essentially, buys insurance to help mitigate their loss from coverage they wrote. Those reinsurers are driving the market as they often are getting hit with the lion’s share of the losses. An insurance company says, “I’m not putting all my eggs in one basket, I’m going to buy reinsurance”. They go to three different reinsurers, which are only for insurance companies, A, B, and C, and offer them, collectively, a premium to cover one-third each of the loss.

The further unpredictability that happens in the market because of these catastrophic losses, coupled with low interest rates negatively impacting available investment income for insurers, puts the insurers in a position where they, now, have nowhere to turn other than try to raise rates to generate underwriting profit. The pressures on insurers to deliver shareholder value (for their shareholders) are much greater today as a result of unpredictable catastrophic losses and low opportunities for investment income.

Question 3: How can an Independent Risk Management Consultant combat rising insurance rates better than a broker?

Albert:  Well, the trick is to make sure that a company is employing good risk management strategies that make its risk better than that of their peers. The risk management plan or as ALS calls it The Risk Management Blueprint, is an essential part of any company’s risk management strategy. It’s hard for an insurance broker to spend the time and get to know a company the way ALS can. In general, insurance brokers are focused on “insurance risk” that aligns with the industry in which the Insured is.

Insurance brokers are, predominately, in the business of selling insurance and do not have the time or experience to become deeply familiar with a company, that’s not generally their focus – it is more a transnational relationship centered on selling the insurance policy. The broker is, generally, getting a commission on the premium of anywhere between 10%-22% so in a way, the insurance industry is compensating their salespeople (brokers) more when premiums increase.  The insured is subject to all the “business dealings” the broker has with their insurers including profit sharing on books of business. instead of the broker working 100% on the side of the Insured they are almost always wearing three hats – their own; the Insured’s and the insurers’ – which creates conflict and leads to viewpoints that are not, always, in the Insured’s best interests. It’s hard to expect them to have not only the knowledge, but also to be focused on one purpose, which is, getting the best result for their client.

What an Independent Risk Management Consultant does is put together a strategy, make sure business leaders have certain risk management principals as part of their business plan, and that will put a company in a much better position to negotiate with their insurer. In a hard market, with rising rates like today's, it takes good guidance and good strategy to leverage that knowledge into the Return on Investment that business leaders want to see. It all equates to having insurance or a Total Cost of Risk (TCoR) that is lower than that of their peers. That’s why they go out and seek Independent Risk Management Consultants, like The ALS Group!

If you have any questions relating to these risks or need help with any risk related issues please contact Albert Sica, our Managing Principal, at 732-395-4251 or asica@thealsgroup.com.

Topics: business, Insurance, Risk Mitigation, The ALS Group, Total Cost of Risk (TCoR), catastrophic loss,, what is total cost of risk, total cost of risk definition, total cost of risk analysis, total cost of risk insurance

The ALS Group

Risk Management Blog

We manage more than a quarter billion dollars of premiums for a diverse range of clients around the globe. 

Our areas of expertise include:

  • Enterprise Risk Management (ERM)
  • Cyber Security & Cyber Liability Insurance
  • Construction Management
  • Customized Risk Management Assessments (RMAs)

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