The insurance industry enjoyed record profits of $60 billion less than two years ago. In the wake of these prodigious returns, the commercial insurance market was flooded with hundreds of millions of dollars worth of capital. This created an increase in the amount of carriers, as well as a greater capacity to take on risk. Ultimately, the influx of capital into the insurance market has resulted in an insurance environment that is extremely soft, with prices falling quickly. For restaurant owners who approach this soft commercial insurance market correctly, some of the largest premium decreases in years are available.
To understand why such attractive premiums are out there, understand a couple points:
First, insurance pricing is cyclical. The inflated prices simply cannot be maintained in the new commercial insurance environment of 2008. A major reason for this is that most commercial insurance companies are public companies. Thus, their shareholders demand growth. In order to grow, prices must be reduced to entice new clients and retain current ones. In addition, insurance carriers must enter new areas that they have no been active in historically. These carriers are then forced to write new lines of the coverage for industry segments like foodservice, hospitality, and franchise programs.
The second point to understanding the reason for the availability of lower premiums is that in the world of commercial insurance foodservice and hospitality is a niche area. Consequently, there is a limited amount of insurance carriers competing against one another to write a restaurant insurance account when the market is stable or hard. Now consider the reality of 2007 and 2008. You may have found that the number of carriers seeking your business doubled. The impact of this insurance market on niche industry segments like foodservice and hospitality can be exponentially greater than what is happening in the standard insurance market. This large supply increase as demand stays static leads to the falling prices that restaurant owners are now finding.
Why is it that buyers are usually the last people to realize the state of the commercial insurance market? Most policies only get renewed one time each year. The can lead to an information gap because the reality is that buyers rely on their brokers to let them know this critical information about the direction in which the market is headed. With markets shifting course substantially, and quickly, insurance buyers sometimes are not made cognizant of the shift until nearly a year later.
Furthermore, select industry groups, brokerage houses, and insurance carriers themselves usually are the ones formulating reports about the insurance industry. Oftentimes, these reports can lag six months behind. Rarely do they portray a precise picture of the current environment in the market. However, consumer expectations are driven by these reports. Many large companies who settled for a 10% pricing reduction will find out later than they could have gotten reductions of 25-30% instead.
There is no doubt that this inefficiency is the Achilles’ hell of the commercial insurance industry, especially at a time when the industry seems to be cannibalizing itself. For foodservice and hospitality companies it is also a situation that should be taken advantage of, especially in light of the fact that it will eventually swing the other way.
While we are currently in a buyer's market, do not allow yourself to become careless when it comes to risk management. You can keep your insurance expenses at levels 25-40% lower than your competition by paying close attention to details and working with an expert. Controlling the basic elements of your risk will allow you to enjoy the benefits available in the market regardless of what cycle it is in.
Here are three additional questions you should be asking that your broker might not be answering adequately, or at all:
1) What is my renewal strategy? Keep in mind that you want to work the commercial insurance cycle, not the other way around. In soft markets, it is sensible to cancel a current policy in an effort to capitalize on lower rates. However, when the market hardens, you may want to negotiate 18-month or multiyear rate terms. You have the potential to reduce your restaurant insurance costs by 20-40% over a five-year period simply by paying close to attention to insurance cycles and acting appropriately.
2) Am I overinsured? You have little to no chance of losing every building you insure in any one single event. However, some people continue to purchase coverage for that very unlikely occurrence. If you have ten $1 million buildings in a state, you do not need a $10 million insurance policy. This is wasted coverage and can be extraordinarily costly, especially in a hard market. Your broker should run a Probable Maximum Loss to determine what the appropriate loss limit should be. Depending what your locations are, you realize that you only need between a $2-$3 million policy to cover the $10 million in buildings.
3) How can I effectively manage my loss history? A good broker will assist you in this endeavor, but most do not even mention it. Understand that your insurance losses stick with you for five years, regardless of whether you have two locations or 1,000 locations. Commercial insurance companies use these past losses to help them predict what your future losses may be. This can have a tremendous effect on your insurance prices. If you are like most companies, you have limited knowledge of the details behind the insurance companies’ loss runs. In essence, you are still being charged for a claim that occurred three or four years prior. Have them audited to be sure that details and numbers are accurate.
One point that cannot be overstressed is the importance of choosing the right broker to partner with. Unfortunately, most brokers simply do not handle enough restaurant insurance claims to maintain up-to-date knowledge on the insurance market for the industry. Obviously, the firm you partner with must understand your business, but you need to also be confident that they also are competent in understanding the environment and knowing the markets.
Keep in mind that these people are your representatives. You should choose them as meticulously as you would choose your legal representation. Try not to be a firm's lone client, but also make sure that you are not a “small fish in a big pond. " A great broker will keep you ahead of your competition, keep you safe, and ultimately add to your bottom line.
You should also make every effort to meet your insurance carriers. Have a relationship with them, in addition to your broker. The carriers need to know you and understand what expectations you have. Not to mention, being on a first name basis will be a big help if you ever need a favor; inevitably you will at some point.
Finally, make sure you are maintaining open dialogue with both consultants and internal employees regarding customer-and-employee injury issues. You have to be tough on claims; but remember that communicating proactively and listening empathetically can turn cut fingers and strained backs into loyal employees and lifetime customers.
Morgan McMillan is a commercial insurance expert and Vice President at McGriff, Seibels & Williams in Dallas, Texas.
McMillan has been honored for his work in the Dallas commercial insurance market.