The insurance buying process can feel like a real slog. Often our clients start the process as much as six months before the renewal date.
It takes that long to create a comprehensive study of expected maximum losses, understand claims data, and design a presentation. And all that to ultimately still end up paying more for reasons you don’t understand.
It can leave you with the impression that there’s really no way to win. But there is, you just need to learn to think like an insurer. And we’ll show you how to start in this post.
First, Understand Your Expected Maximum Losses
To get into the mindset of an insurer, begin by understanding how they see you. More specifically, how they see your risk in terms of expected maximum losses.
Let’s look at a typical EL insurance policy wording:
“Policy excess of £1,000, cover limit £100m per occurrence”.
This means that the insurer will pay up to £100 million per occurrence in excess of £1,000. What you may not know, and what isn’t often stated in the policy, is that there is no annual limit to this.
On the surface, this wording might seem reasonable. After all, it’s not unthinkable that an event might cause £100 million worth of damages. However, the likelihood of such an event happening multiple times throughout the year is vanishingly small.
But that’s what you’re paying for when there’s no limit!
With that policy wording, you’re telling the insurer that you expect multiple such events throughout the year. And that your expected maximum losses are in hundreds of millions or even billions of pounds.
You can apply a simple fix to the wording that presents a much more reasonable risk to the insurer and still protects you – a split limit policy.
£10m limit per claim, £100m limit per event (and say £250m per year, if you are not compelled to buy statutory coverage, which cannot have any annual limits on the insurer’s payout )
This way the insurer knows your expected maximum losses aren’t going to lead to a catastrophic depletion of capital.
Next, Understand the Anatomy of Your Premiums
Again, forget about your end of the equation. Think about your premiums from the point of view of the insurer.
What does the insurer need to cover with your premium?
- The risks of insuring you. That is to say, the costs of any claims you’ll make during the insured period. In actuarial terms, this boils down to the probability-weighted average of potential future claims, according to your specific policy wordings, for policyholders like you with your core risk metrics.
- The additional expenses incurred by insuring you. All the overhead costs, administrative expenses, commissions, premium collection costs, etc. that the insurer will incur as a result of your business over the insurance period.
- The profits owed to shareholders. Insurers ultimately need to generate a profit and their shareholders’ expected profit over the insurance period needs to be worked into your premium.
Start with a Level Playing Field
Armed with this information, you can start to apply it in your insurance negotiations. Look at every part of your policy from the perspective of your insurer and what it means to them.
- Everywhere you’re asking for unlimited coverage, think about what it can do to your insurer. Unlimited coverage increases the possible number of claims and potential claims amounts. So the insurer will have both increased expenses to file the claims, increased expenses from claim payouts, and will need more profits to cover the consequent losses. It’s one of the most damaging things to your premiums.
- If the policy includes profit shares, that’s not something you’d like as an insurer. It increases administrative costs since the profit shares need to be calculated and managed. It also increases expenses when the profit shares are paid out. And it calls for increased overall profit to cover the loss of the profit that was shared.
- Policies that include long-term agreements tell insurers two things. They’ll have increased expenses to draft, administer and customise the wording of the agreement. And they might need to renew insurance on a risk they no longer want to insure. Both of these elements necessitate increased profits to satisfy the possible enormous losses.
And That’s Not All
Those are just a few of the policy elements that insurers see as added expenses. The more of these you can reword or remove, the easier it will be to negotiate down your premiums.
Our InsuranceInspect Services consultancy product can reveal all of your core risk metrics. And we’ll ensure your requested policy wordings are as insurer-friendly as possible to negotiate lower premiums and review your premiums for fairness.