The end of the year is a busy time for CFOs and Controllers. In addition to finishing up their CPE requirements for the year, those working in industry are also haggling with department heads about budgets, discussing any issues related to closing the books, and struggling to find a few minutes to allocate pay raises among staff. While the insurance renewal process often takes a backseat to many of these other tasks that we do, we should realize that it is an integral part of how we manage and maintain the assets of the organization. For this reason, we should know what our insurance broker is doing when they are building an insurance program for us. This can help us to better know what risks the company has retained after policies are put in place, as well as the areas where we could be over-insured and wasting company money.
While every business is different and has unique risks, the general approach that brokers take to building an insurance program for a company can be summed up in a few key steps. First, they will want to get a sense of the size of our business (revenues, number of employees) and the products or services that we offer. They will also want to know where we operate, our core processes and systems, as well as our internal controls. Larger companies who operate in several markets usually have the potential for larger claims, so knowing average revenue figures as well as where the company is deriving revenue is vital for the insurance broker.
Once the broker has a good understanding of the business, he/she will build the insurance program using a layering approach:
|Package Policy – CPP or BOP
Typically, most brokers will start with a package policy – either a commercial package policy (CPP) or a business owners policy (BOP). A package policy is one that consists of many coverages bundled together that most businesses need. For example, a CPP might include general liability, business property, and commercial crime coverages. A CPP is often used to meet the needs of medium to large businesses, while a BOP is a package policy specifically geared towards smaller employers. Insurance companies employ simplified underwriting procedures for BOP policies. In other words, the policy will be priced based on only a few key variables, such as revenue and number of employees. These simplified procedures keep costs down for insurance companies making rates on BOP policies more affordable for smaller businesses.
Once the package policy is in place, then the broker will typically look at specific areas of the business where the base coverages may not be enough. This second layer of an insurance program generally consists of specialized coverages. For example, a business may be engaged in some form of internet selling or collecting information from potential customers (such as collecting contact information for a monthly newsletter). Very little coverage for these types of activities is included in standard package policies. For this reason, a broker might recommend a cyber policy in addition to a package policy. Any unique risks a company has will need to be covered with a specialized policy.
Finally, a broker may recommend an umbrella policy. While most claims should be covered in the first two layers discussed above, the umbrella layer provides additional coverage for catastrophic claims. Let’s say that your base level policies have a coverage limit of $250,000. If you have a $300,000 claim, the first two layers would not cover the entire cost of the claim. An umbrella policy would be necessary to pick up the remaining $50,000. Umbrella policies tend to be lower in cost than the base level policies, because very few claims ever reach that layer. Most claims are handled under your base level policies – not under the umbrella policy.
Once the insurance program is in place, it becomes important for finance leaders within companies to tell their broker about strategic and operational changes to the business during the year, such as when additional products are added, plants are closed, or when a company begins selling in a new territory. Keeping the broker informed of business changes can help them adjust your coverages and make sure that claims are covered. It can also help you to rest assured that you are effectively safeguarding the assets of the organization – while you are juggling everything else!
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