A CFO's Guide To Insurance

A CFO’s Guide to Insurance - a 15 min read

Last updated: May 1st, 2021

The goal of this guide is to help you understand the insurance business behind the scenes and give you actionable insights on how to:

1. Become more insurable and
2. Get the best pricing/terms for your business insurance.

We also answer common questions like: "how often should you shop the policy?" or "when is the best time to quote?"

Table of Contents

1. How does insurance really work?
2. What should CFO's consider when buying insurance?
3. Holistic risk management
4. How to get the best pricing?
5. When is the best time to quote?
6. How often should you shop a policy?
7. How does to stay in the insurer's good books?
8. Glossary of key terms

When purchasing insurance for your business, there is an overwhelming amount of choice. You need to choose which insurer to use, which distribution channel, and even which advisor to use to help you put together the best insurance portfolio for your needs. To make the selection process even more difficult, insurance policies are hard to read and even harder to understand. 

My hope is that this piece will give you a high-level overview of the key considerations when purchasing insurance and help you simplify the selection process.

How Does Insurance Really Work?

To put it simply, insurance is a short-term contract of indemnity that renews annually. An insurance policy provides financial reimbursement (indemnity) when the insured is found responsible for causing loss or injury to a 3rd party (liability insurance) or when a specific peril damages an object of insurance (property insurance). Other specialized coverages such as business interruption to replace lost income during an interruption in operations or cyber insurance are also available.

From the insurer’s perspective, their goal is to ensure that whatever premiums they are charging for insurance are greater than the losses from its portfolio of risks. Basically, they want to make sure they are taking in more money than they are paying out. Insurers will try to cover any shortfalls in this math with investment earnings to ensure they earn a net profit.

One thing to note is that insurance only covers a limited number of risks. For example, while a business interruption policy would cover income lost due to interruptions to your business caused by a fire at a critical supplier, it will not cover any reputational damage you suffer due to delayed deliveries to clients. 

Risk that is not transferable via an insurance policy should also be managed. Therefore, as a risk manager, you must work to identify, prioritize, and manage non-insurable risks as well. Depending on the situation, it may make sense to redirect some premium dollars towards managing those types of risks – especially if they would have a noticeable impact on the business.

What Should CFO’s Consider When Buying Insurance?

Most insurance buyers focus on getting the “best deal” possible when buying insurance. Part of this is the fault of advisors who sell based on price alone but if your business were ever to suffer a serious claim, the cheapest policy is rarely the best one.

Instead of focusing only on the price tag, here is what you should look at instead:

1) Insurer Selection

In Canada, there are 192 property and casualty insurers competing for business. Cumulatively, they write CAD$55.81 billion in net premiums and paid out CAD$41.6 billion in claims. Despite the large number of insurers writing business in Canada, only a select few are willing to write large policies. Among those insurers, if you want to choose one with a high credit rating from AM Best or Standard & Poor’s, that pool of potential insurers shrinks further.

Choosing an insurer, you want one that has:

·       High credit quality per AM Best, S&P, etc.

·       An underwriting/adjusting team that is collocated geographically with your operations for expedient claims service

·       A track record of paying claims promptly

·       Stable and growth oriented

·       Good communication during underwriting, claims, and servicing of the policy

2) Policy Wordings

Wordings can vary widely from insurer to insurer and the standard contract wordings may not give you the protection you were looking for. You might also see significant price differences between 2 insurers where the limits of insurance are the same.

Why is that? It’s all in the wordings - one may offer much broader coverage hidden in the details. For example, even though they both show a liability limit of $10M the more expensive company might separate product and service liability in their policy wordings essentially giving you $10M for EACH TYPE of liability rather than $10M for both.

Another thing to watch out for are other advantageous clauses such as a liberalization clause or the ability to defend claims under the law of multiple jurisdictions. Most policies can only defend claims brought in Canada which may not be preferable if you do business internationally.

Make sure you review the contract wordings with your advisor or – if the policy is big enough – even employ a specialist law firm that has experience reviewing insurance contracts to give you appropriate advice.

3) Advisor Selection

For most finance leaders, insurance is not in their core area of competency – which is why it is so important to work with a trusted advisor. 

When selecting an advisor, ask yourself the following questions:

1. Are you able to have an open and candid conversation with your advisor and underwriters?
2. Does the advisor/service team understand your business’ fundamentals and risks?
3. Does the advisor have access to insurers that match your needs? Most complex businesses only have a handful of insurers that would be interested.
4. Does the advisor have clients like yours? If so, they’ll understand your needs better AND have carriers that suit your needs.
5. Are there clear service expectations around audits and check-ins after a policy has been placed?
6. Is the advisor placing your interests ahead of theirs?
7. Are they accountable? Do they do what they say and deliver on time, every time?
8. How long has the advisor and service team been with the company?
9. How is the advisor paid? Many larger brokerages/agencies pay their advisors upfront and little to nothing on renewals. This might mean they’re less incentivized to stay on and deliver good service after the initial sale.
10. How much do you get paid? An advisor who is unwilling to or isn't proactive about disclosing their compensation or how they're compensated could be a red flag.

Does It Make Sense to Use More Than 1 Advisor?

Many insurance buyers believe that by approaching multiple advisors to quote, they can create competition and get a better rate. While this may work for other products or services you purchase, the truth is, in 99% of the cases, there is no benefit to using multiple advisors. 

Not many people know this about the insurance business, but an insurance company can only work with 1 advisor at a time on a particular policy. If the insurer has started working with one advisor, they will reject other advisors that approach them – we call this “blocking the market”. This means that there is no benefit to using multiple advisors unless one has access to markets or products that the other does not.

What you want to do is create competition amongst the underwriters so that they offer better terms or more competitive pricing NOT the advisors. A good advisor will be adept at creating this type of competition and leveraging one insurer against another to get you the best terms and pricing possible.

That said, there are always exceptions to the rule so if you’re receiving poor service or want to hold your advisor accountable and ensure they’re really working for you, assigning the account to another advisor might be beneficial.

At the end of the day, we work for you and advocate on your behalf when dealing with insurers.

How Do I Choose an Advisor to Work With?

When you have multiple advisors pitching you and offering their services/expertise, how do you choose? Well, the first thing you want to do is ask them those questions I outlined earlier. That way, you can a sense of their domain expertise, professionalism and whether their incentive structures are aligned with your goals.

Instead of asking multiple advisors to go out for quotes, your best bet is to run an interview process. Think about what you would do when hiring someone to join your team because that's exactly what this is. Ask each advisor to present or pitch to you and the leadership team. In their presentation, they should show that they understand your business, the industry, your needs, and demonstrate a plan to help you achieve your goals.

4) Fair Pricing

We talk about pricing “last” here because even though it is important, the other considerations detailed above should be given priority. This old German adage holds true in the world of insurance: ”das billige ist immer das teuerste” – the cheapest is always the most expensive.

Holistic Risk Management

As we mentioned above, not all risks are insurable and sometimes there are better ways to handle certain risks. When structuring an insurance program with your advisor, you will also need a clear perspective on these other factors:

Risk Tolerance

Outside of an insurance portfolio, what are you doing to manage non-insurable risks? What about risks that can be economically retained? For certain risks like minor theft or shoplifting, it may be more economical to set aside a monthly budget to cover those claims instead of purchasing an insurance policy.

Capital Market Risk

This is an important one to consider if you run a publicly traded entity or have external shareholders. How would capital markets react to a large loss? Were these risk disclosures identified in shareholder reports? Risks of this nature can be addressed with an appropriate Directors & Officers insurance policy.

How To Get The Best Pricing

Underwriters are busy people. To get the best pricing possible, you need to get to the top of their stack. Show them something exciting and make sure they feel that this is a profitable risk to insure. 

The foundation is to choose an advisor that understands how to put together a compelling submission, create competition amongst insurers, and leverage them against each other to get the best deal possible for you.

To create a compelling application, there are 3 C’s to focus on with your advisor:

1) Culture

‘C’ #1 is Culture. How do you treat employees? What does your employee retention look like? How are the leaders involved with the business beyond high-level decision-making? 

2) Capture

Capture means taking photos or videos of your facility. This one helps the underwriters get a good sense of your facilities, job sites, etc. and their state of maintenance. If they are clean, safe, and well organized, have your advisor include this as part of your submission. 

Underwriters will look upon this favorably and view you as lower risk thus giving you better pricing.

3) Conversation

This helps for some of the more complex risks. Having a conversation directly with that underwriter either in person, on Zoom, or over the phone can do wonders for getting complex policies across the line. Getting all the underwriters competing on the business on a conference call together can also be a great way to put downward pressure on premiums.

As much as we like to do things over email nowadays, nothing beats the assurance someone feels after a live conversation where you have answered all their questions in an open and forthcoming way.

Your advisor should be there with you to facilitate and prep you for the conversation.

Implementing these 3 C’s will help you “sell” your risk to underwriters, help them feel more comfortable with it, and ultimately, get you better pricing.

In summary, advisor selection is the single most important aspect for increasing your insurability and getting the best pricing and terms possible because they'll be sharing with you these tips.

When Is the Best Time to Quote?

When should you start the process of shopping your insurance or talking with another advisor? The key is to know your policy(s) expiration date and work backwards. We're using more complex policies here as an example so your specific timelines may vary.

You will likely want to see alternative proposals at least 2 weeks before your expiry date so you have time to decide. So, if your policy expires January 1st, you’re going to want proposals to review by December 14th.

Your advisor will want to get quotes at least a few days before December 14th so they have time to review and correct any mistakes. That means they will want quotes in hand by December 10th at the latest.

In order for your advisor to get quotes in hand by December 10th, underwriters will need at least a 30-day head start so they’ll need to get a complete submission out by November 10th. This ensures you get the priority with underwriters and give them enough time to work with you.

Now, for the advisor to get all the information they need (loss history, photos, etc.) it may take an additional 30 days. This gives enough time to go over any due diligence questionnaires, gather supplementary information, and every else we need to have a legitimate chance at getting you quotes.

All this means that you should start the process with your (new) advisor at least 60-90 days out from your expiration date to give yourself the best chance of getting the most competitive terms and pricing available. Realistically though, if you intend to re-evaluate your insurance arrangements, you should start talking to other advisors 4-6 months out because you want time to vet 2 or 3 different agents and pick one that you want to move forward with.

If you stick to this timeline, you will increase your chances of getting coverage at the best terms and pricing possible.

Bonus Tip #1: Ask your current advisor 90-120 days out from the renewal date for a marketing report on what markets they’re going to. Afterwards, ask them for detailed responses to keep them accountable and ensure they are actually shopping the market for you.

Bonus Tip #2: In 99% of cases, you should only be quoting with 1 advisor. That said, you should still be in conversation with a few others to get a feel for the market and what you should expect.

How Often Should You Shop Your Policy?

In most cases, you should not be shopping your policy every year. If underwriters see the same submission over and over again each year, they will grow to simply ignore it or not put a lot of effort into pricing or underwriting. Insurers spend a lot of effort underwriting the business in the first year and likely won’t turn a profit on your account until a few years in. If they see you switching constantly, they might consider it unprofitable for them and decline to even look at it.

If you do choose to shop your policy often, have a good story or reason behind it and be strategic. A good reason to shop might be if your advisor tells you that a new insurer has entered the market.

How To Stay In Your Insurer’s Good Books

As with most things in life, staying in someone’s good graces involves adhering to the golden rule: treat others as you’d like to be treated. Here are 5 tangible things to do (or not do):

1. Report claims on time.
2. Notify the insurer (through your advisor) of any changes to your business in a timely manner.
3. Pay your premiums on time. If you are habitually late on payments, the insurer might consider the administrative costs too great and refuse to renew your policy next year.
4. Don’t change carriers too often. Unless you have a good reason, changing carriers more than 3 times in 5 years is a red flag as it indicates that you may not be a profitable account.
5. Don’t grossly under-report revenues and payroll. Slight discrepancies are OK but if they discover a large difference during an audit, it can look deceptive and impact your renewal.

Important Terms to Know

In the insurance industry, we use a lot of acronyms and jargon. Since transparency is one of my core values, I thought it was important for us to explain some of them here.

Letter of Brokerage (LOB) aka Broker of Record (BOR) Letters:

Remember that insurance companies can only release terms to one advisor at a time for an account. An LOB or BOR is a way of assigning control of an account from one advisor to another.

For example, you might use a LOB to assign control of your existing policy to another broker that is providing you better service. The incumbent broker would still earn their commission for the current policy term so you do not need to worry about being unfair to them, but services going forward will be provided by the new broker.

Marketing:

When insurance advisors refer to “marketing” we are not talking about advertising. In industry lingo, marketing is when we take your risk to market and shop around with insurers to get you the best terms and pricing possible.

“Blocked” or “Blocking”:

If you have ever approached another advisor to get competing quotes on your policies, they might have come back and told you that they are “blocked”. This happens when that insurer has already been approached by another advisor, so they are unable to quote again.

To avoid this, you should either stick with one advisor (provided their service levels are adequate) or assign markets to each advisor (ie. Advisor A goes to these 5 insurers while Advisor B goes to these other 5). Remember, the key is to create competition amongst insurers, not advisors.

Certificate of Insurance (COI):

As advisors, we are frequently asked to provide these as proof of insurance. This might be required by clients who want to retain your services, lenders who want to see proof of insurance before lending you money, or landlords who want to ensure their interests are protected.

Audit:

This applies primarily to liability insurance. With liability insurance, premiums are set based on projected revenues. At the end of the policy term, they might do an audit and adjust the premiums up or down based on actual results. To avoid any surprises come audit time, you advisor should check in regularly (quarterly, etc.) to make updates as necessary.

DISCLAIMER

The material and information contained in this article is for general information purposes only. The ReFrame Group is not qualified to give legal advice. You should not rely upon the material or information above as a basis for making any business, legal or any other decisions. Whilst we endeavour to keep our information up to date and correct, The ReFrame Group makes no representations or warranties of any kind, express or implied about the completeness, accuracy, reliability, suitability or availability with respect to the information contained in this document for any purpose. Any reliance you place on such material is therefore strictly at your own risk. Contact me directly for more specific advice tailored to your unique situation.

Big thanks to Micah Salas for the inspiration and the ideas!