Date post: | 24-Dec-2015 |
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“Un-baking the Insurance Cake”Seeing Insurance for the trucking and logistics industry from a different point of view
Topics for discussion Do you view your insurance as a commodity or a
specialty product? What does a “good” insurance placement mean to you? Let’s look at the parts of the cake?
The decoration The icing The top layer The middle layer The bottom layer
Questions you want to ask at your next renewal?
Commodity or Specialty?
Would you buy “brain surgery” from the lowest bidder?Should you buy insurance from the lowest bidder?Why do insurance companies “bid” on accounts?
What does “good” Insurance Mean?
“I am paying $6,000 per unit I’m happy” “My loss ratio is 30% I should get a reduction” “I had a “big” claim my insurer took only a modest
increase” “My broker “went to market” and I got a cheaper
quote” “My broker reduced his commission which got me a
better price”
Some things I wonder about… What does $6,000 per unit premium mean? What does a 30% loss ratio mean? Why do insurers think they have to increase your
premium after you had a claim? Why do insurers “quote” on new business based from a
“submission”?
Let’s “un-bake” bake that cake!!
Disclaimer!!!
Richard asked me for a catchy presentation title on short notice. I picked the “cake” thing and now I am stuck with it. -- you will now be subjected to a series of “cake” clichés -
Please address all complaints to Richard
A Chocolate Layer CakeDecoration
Icing
Top Layer
Middle Layer
Bottom Layer
Sales
Insurer Services
Excess Layer
Working Layer
Burn Layer
Let’s imagine that this cake costs $500,000
You are 60 days from your renewal This year You have had 7 claims. All are less than $100,000 Three years ago you have one $500,000 claim Other than above you have had $50,000 in claims every
year. Claims total $200,000…a 40% “loss ratio” Allowing for expenses,…your insurance company made
$175,000 from you policy.
Wrong!! – here is how the baker sees the cake
The Decoration
This is the “distribution channel”…your broker:
Inclusive of commissions, contingent commissions and insurer marketing the decoration costs about 13% or $65,000…what are you paying for?
You can reduce this cost – but should you?
You are a valuable asset to your broker – Is your broker a valuable asset to you?
Your broker is a big asset when you are in a jam. It takes time to build that asset
If and when you need to spend your nest egg, the costs are high and can save your cake!
The Decoration
How to build that your broker as an asset: Their value as an asset lies in their access to markets
in a pinch You may never need this value but it is good
Insurance Their value to you is the value they bring to the
market…know what that is Pay them a competitive rate
The Icing
These are your insurer services:• Underwriting• Claims• Loss control• Finance• Actuarial
The icing costs roughly 17% or $85,000 – what are you paying for?
The Icing
Is your Insurer a partner or a vendor? Have you met your underwriter? Does loss control “Analyze Risk” or “Integrated” Is your adjuster the “next available operator” – or
“pre-disposed” to your business? How does your insurer compete and compare as a
financial institution? What is your insurer’s point of view where pricing
ought to be and where the market supports?
The Top Layer of the Cake
The excess layer. $3M of coverage excess of $2M. – a pure sharing of risk. This layer cost 10% or $50,000. – Do you know this? Low to no predictability of loss on an individual account
basis. Insurer paid $35,000 on this layer whether or not you had a
claim. Your rate should not go down if YOU do not have a claim. Your rate should not go up if YOU have a claim in this layer
The Top Layer of the Cake
You should be paying rate based on how this layer performs in the insurance market -and-
How you compare against your peers.
What is your insurer’s underwriting profit is in this layer
What is your insurer’s investment profit is in this layer
The Middle Layer
The working layer Coverage from $250k to $2M – a hybrid of sharing
and burn This layer costs 30% or $150,000. Do you know this? Some predictability of loss on an individual account
basis. Your insurer budgets for you to have occasional
losses in this layer.
The Middle Layer
To gauge your performance in this layer (Layman’s terms)
70% of the premium ($105,000) should be allocated to loss 50% of that ($52,500) is pure risk sharing….spent before you
start. How has your account performed over the past 5 years on
the other 50%. i.e. one loss $500,000 loss in past five years:
$250,000 allocated to middle layer Divide by 5 is $50,000 per year. Annual underwriting profit on this year of $2,500
The Bottom Layer
The burn layer – the foundation – “centre of the universe layer” Coverage from $0 to $250,000 – purely based on YOUR results:
Upper level can vary This layer (in YOUR case) cost $165,000 – You should really know
this Layer pricing based on YOUR LOSS PICK
Your insurer’s prediction of what YOU WILL incur Working and Excess Layers are built from your pick Frequency – not Severity – is what should keep you up at
night
The Bottom Layer
Insurers use loss and exposure history and apply development factors
You incurred $200,000 in losses in the first 10 months. Your insurer believes that this will grow to $474,800…will it?
10 22 34 46Dev. Factor 2.374 1.526 1.289 1.153
Months Aged
The Bottom Layer
Let’s look into the past
Five year average is $196,290 Average on four prior years is $126,662.
Losses Dev. Fctr UltimateThis Year $200,000 2.37 $474,800Last Year $50,000 1.53 $76,3003 Years ago $250,000 1.29 $322,2504 years ago $50,000 1.15 $57,6505 Years ago $50,000 1.01 $50,450
The Bottom Layer
What is your Loss Pick? What is the upper limit of your Burn Layer? What is the confidence level of that Loss Pick?
If there is a high degree of confidence in the pick….IT IS NOT INSURANCE
IT IS A BUSINESS EXPENSE
Did Your Insurer Make Money
Say Insurer has a 75% loss ratio in Working and Excess Layers…
Premium $500,000Decoration $ 65,000Icing $ 85,000Top Layer $ 37,500Middle Layer $162,500Burn Layer $200,000 (or maybe $474,800?)Underwriting Profit $150,000