When renewing insurance each year, most, if not all, dealers use a heuristic technique for making insurance decisions. Examples of heuristic techniques are trial and error, rules of thumb, or educated guesses. Heuristics provide shortcuts in decision-making when we are faced with too much information to process in a reasonable amount of time or with a reasonable amount of effort. It is often too hard, too time-consuming and too complicated to review and assess our ongoing insurance needs. A heuristic technique simplifies our lives and helps us to arrive at decisions faster.
However, insurance decisions ought to be made by careful analysis, weighing the costs and benefits of a program, analyzing pros and cons, and evaluating all your options. Many equipment dealers will consult an attorney for contracts and a CPA for taxes, but never consider an insurance advisor to help them build a comprehensive insurance program. Securing the services of a professional insurance advisor is the best way to make sure your insurance program fits the needs of your business, and the policy is built based on coverage needs rather than premiums. An insurance advisor will design and build the insurance program, evaluate coverage needs, and secure the best price for the right protections. When considering the impact risk exposure can have on a business, securing the help of an insurance advisor is a wise choice.
Coverage and Premiums: Objectivity is Key
Employing a heuristic technique in decision-making can simplify the process, but heuristics like gut instinct or trial and error are tainted with bias. Recommendations from an insurance agent are more reliable than trial and error or gut instinct, but insurance agents are limited by the protections that their companies offer and cannot be truly objective on coverage when they are incentivized by higher premiums. Agents are limited by access to or preference for carriers, which narrows the scope of solutions available to their clients. An agent may have access to many carriers but usually works with only one or two that hold their books of business. These limitations are even greater for direct writers, who have only one carrier to quote. If that specific carrier does not offer the right protection for your business, the direct writer is in a difficult position, having to either recommend a different carrier and agent or sell coverage that lacks the needed protection.
In contrast, only an insurance advisor with access to the entire insurance market rather than one or two carriers can bring you truly objective information. Advisors start the process by examining the business – what protections are needed, is there any redundancy in the current program resulting in overpayment, are there any risks or fraudulent practices in place, how has the business grown – and then they build a program based on need. After the needs assessment, the advisor has no limitations on carriers to shop from and can submit the information to any number of agents for a quote. Advisors can also make recommendations that are not tied to premiums, because advisors are paid by the client, not by the insurance company, and are not incentivized by higher premiums. Their main objective is to make sure their clients are covered properly without overpaying.
Case Studies How an Advisor Becomes an Asset
Case 1: We recently reviewed a workers’ compensation policy and discovered an error in the code of a category, which impacted the total dollar amount of the premium. The error was carried from year to year for over five years and cost the dealer more than $400,000 in total. After we reviewed the policy and eliminated the error, we saved the dealer $90,000 in the first year. Without critically reviewing the coverage and building a plan based on the needs of the dealer, this error could have continued indefinitely, racking up unnecessary expenses for the dealer.
Case 2: Insurance premiums are based in large part on the total value of the inventory being insured. A dealer, at the advice of an agent who was trying to win the business, was underreporting the value of the inventory by more than 65% in order to pay lower premiums. In other words, less than 35% of the actual inventory value was reported. All state laws require at least 80% coinsurance, or valuing inventory for at least 80% of its actual value. Underreporting at less than 80% requires the dealer to participate in the loss. Underreporting at 65% may require the dealer to pay 65% of the claim, or even to be fined. Worse, the insurance company could refuse to pay the claim entirely, and the client would risk cancellation.
Case 3: Agents might not use an apples-to-apples comparison. We walked a client through a situation where four agents were competing for the same business. Each agent used different numbers to rate the premiums, which made direct comparisons very difficult. When we completed a side-by-side comparison, the agent who was initially the low bidder ended up with one of the highest premiums submitted. We were able to help our client achieve the best rates and the most appropriate coverage.
Advising Process: More Proposals Means Better Rates
Without an advisor in place, most dealers will take quotes from only two agents, in order to manage the process and prevent the decision from becoming overwhelming. Requesting more than a couple of quotes means more time and effort goes into the decision-making process, so it makes sense to limit the number of agents involved when a dealer reviews insurance quotes without an advisor.
An insurance advisor helps the dealer sift through more information and truly evaluate the best insurance proposals. A true insurance advisor does not work for the insurance agency, they work for the dealer. The advisor collects the information from the dealer, assesses the dealer’s needs, and submits the information to the agents who are willing to provide a proposal. With an advisor, all agents who are willing to participate may do so, but the dealer will only have to work directly with the advisor. This is to the dealer’s benefit, since they will be able to reach the entire market, both independent and direct writers, without a constant barrage of calls from four or five agents.
Insurance advisors save hours of the dealer’s time and ensure the best protection for their business at the most reasonable price. The advisor will take all proposals and do a side-by-side spreadsheet comparison of all numbers submitted, and then give each agent a final opportunity to compare apples to apples. The final decision will be made by the dealer, assuring that all the agents have been thanked for their valuable time and hard work in preparing the proposals.
Payment: Agents vs. Advisors
The agent or agency receives between 15% and 18% commission. Most premium increases can be attributed to umbrella rates, auto liability and physical damage rates, as well as liability premiums. When premiums go up every year, the agent receives a raise.
The advisor may charge a fee of up to 10% of the final premium in the first year, and that fee is locked in and remains the same year after year. This payment structure does not give the advisor any incentive to have the dealer’s premiums increase, but it does give the incentive to have the dealer’s premiums come down or remain the same. With one account, we reduced the dealer’s premiums by 20% twelve years ago, and premiums have remained almost the same even though the dealer has had increased sales and inventory as well as property changes.
RICKER & ASSOCIATES WORKS FOR THE CLIENT, NOT THE INSURANCE INDUSTRY
James G. Ricker, CEC | Ricker & Associates | firstname.lastname@example.org