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Thread: The Importance of an Insurance Budget

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    Default The Importance of an Insurance Budget

    The difference between a large multinational corporation and the majority of your limousine operations is that you are most likely wearing every hat. You are the CEO and the bathroom attendant. You are the head of Public Relations while at the same time the mail clerk. You are also the Operations Risk Manager while at the same time you are doing every other little thing that you cannot justify the expense to hire someone whereas a large corporation is able to justify the cost.

    What I have noticed in my years of insuring for-hire transportation operations is that many never have a true cost budget for insurance or most other items for that matter. I am going to finish talking about other line items and only focus on insurance costs from this point on because to do otherwise only assists in commoditizing insurance—something which it is not. I will also not participate in a discussion which demonizes an insurance company, because during a claim, I have personally never heard an insured talk about how awful their insurance company is other than the occasional comment about how the claim took longer than was expected to adjust. I will admit that there are some not so good companies and sometimes where claims are in a grey area as to whether coverage is present or not, and leave it at that.

    The reason I bring this up is because the soft insurance market we are in now and have been in for the last eight years is coming to an end—slowly, but coming. Reinsurance rates have increased by 1.5% this year after eight solid years of decreases. 1.5% may not sound like a lot, but 1.5% of billions of dollars is a lot more than my calculator is able to calculate, nor do I particularly care to do the math because I cannot control these rates. This is happening for a multitude of reasons, however for simplicity, only the glaring ones will be addressed.

    Insurance premiums have fallen consistently, while losses have increased. This combined with the fact that interest rates are at an all-time low and the stock market is too volatile to accurately predict good investments, insurers are unable to make an investment profit, meaning they must now make an underwriting profit. When the stock market is doing well and interest rates are paying well, carriers are able to take losses on their underwriting revenue with hopes they are able to make their profit with their investments. Due to the fact that many carriers are running in excess of 100% loss-ratio, it may be easy to understand that to make up for these losses premiums are going to increase.

    These were easy to predict a firming of the market. Combine those with the unforeseen catastrophic weather losses experienced in the US since 2008 (Midwest hurricane in ’08, followed by the Midwest ice storm; the windstorms in ’10 & ’11, as well as the hurricane just recently) in addition to the earthquake, tsunami, nuclear meltdown in Japan, these wiped-out cash reserves. Once these are taken into account there is nowhere else to go but up.

    These increases will be across the boards, however, they will rightly affect those accounts that have poor loss history or operate in a manner that is riskier than an insurer wishes for one of their clients to be, which will result in non-renewals of policies for certain classes of business or only those insured’s the companies do not feel comfortable insuring, and stricter underwriting guidelines for all.

    With this said, an insurance broker cannot control rates, they are filed by the companies and they are what they are. What an insurance broker can control or at least assist in controlling is how an increase in premiums is handled by their clients.

    Corporate risk managers do not budget for what their insurance costs are currently or what they were the year before. They budget for what their insurance costs could given an increase due to factors inside or outside their control. When the market is a buyers market for the insurance purchaser, then they take those lower rates as a bonus, but they never forget what they could be. WHEN their insurance rates begin to increase they are able to absorb these increases and it does not cripple their companies operations. If the rates do climb higher than their budget, which does happen such as after 9/11, they are still better able to absorb such increases, but they also shift some of their liabilities from the insurers and take this risk on themselves in various ways. This is primarily accomplished by increasing deductibles, or even so far as self-insuring certain aspects of their operations where the risk of loss is less likely.

    I am writing this not as an advertisement, but as a benefit to you operators that have not been in this industry for as long as a few guys here on the forum that have experienced a hard market and made it through whereas a lot of operators did not make it after 9/11—I imagine that Wade, Jim Luff, Gunny, and Mr.Q have been through more than one hard market (as well as other members on here that are a bit vague with their time in the industry). There are many brokers that do not tell the honest truth about where the market is headed because we have had eight solid years where price decreases are a given and increased coverage is a given so it is very easy to lose sight and think of insurance as a commodity and not a vehicle to protect assets. We are headed towards increased pricing and limited coverage.

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    This is an increase in rates. In the past eight years there have declines in rates, which if insurance rates are based on inflation, people would expect an annual increase in their insurance costs rather than expect an annual decrease. Insurance rates are not determined much by inflation, rather on the amount of revenue or lack of revenue from the underwriting side and investment side. Inflation does have an impact on how much a particular claim costs though.
    Last edited by Limo Insurance King; October 28th, 2011 at 02:18 PM.

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    Senior Member Wade Randolph's Avatar
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    Just what I wanted to hear after adding new cars. LOL

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    Quote Originally Posted by Wade Randolph View Post
    Just what I wanted to hear after adding new cars. LOL
    I think it is time we "Occupy Riverside Limousines." Wade, you must be the 1% that is able to add NEW cars in such a horrible, horrible economy. Mom! Can you get me another Mountain Dew?!?
    Tim Wiegman, Jr.
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    Senior Member Cedar Mill Limousine's Avatar
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    Very good "wake up call" Phil. You and I have talked about interest rates. I am baffled on why the fed continues to keep the rate low. It was a necessity in the beginning of the meltdown to help stabilize and give the banks "free" money. But now, it seems like the one thing that could help bring the economy back. Those that have even a little money set aside could make money. If you have $10K in the bank, chances are that you are not going to spend it, but if you made interest on it, chances are that you would spend some of that. Also, like you have mentioned, other companies could make money and spend it. The only bad effect would be those that have a balance on credit cards and adjustable mortgage interest rates. Either way, inflation is taking it's foothold in a major way - if you haven't noticed, fuel and food have increased exponentially. These are only the beginning. In your post, I didn't see any mention of Obamacare. We recently had our annual health insurance meeting at my other job, and they blamed alot of the price increase on the uncertainty of what is to come. Does this also affect the insurance industry as a whole?
    Rich Rottier
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    Thats a good question about Obamacare. I do not know much about Health Insurance, and while they work in a similar fashion to Property & Casualty insurers, it is limited to geographical bourdaries and obamacare is focused only in the US whereas the Property & Casualty insurance world truly is global in nature and can be affected in one geographic area by the losses and economies in other areas.

    The problem we are facing now has been unexpected excessive losses on a global scale in addition to a global economic downturn.

    I should have clarified my previous post concerning inflation. Inflation does impact insurance rates, due to the fact that when "things" cost more to buy, they cost more to replace when an insurance company pays for any particular loss. Therefore, if a carrier is not making any money on their investments, and they are running a high loss-ration, they must operate more like a mutual company and price their product at a true cost which produces at least enough revenue to cover expenses, tighten their underwriting guidelines, and restrict coverage. However, if losses are kept low (which they haven't been) and the investment markets are performing well or at least the risk of loss is not great, then inflation does not have a huge impact on rates.

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    Latest report out is that Commercial Auto rates are taking the largerst increase for accounts under $1mm in premium, per MarketScout (insurance trade publication): http://www.insurancenetworking.com/n...t-31636-1.html

    While the report says 65 increase in the Commercial Auto marketplace, within the Public Auto segment, the average is 8% increases.

    It is suprising to me that Property did not take the largest increases due to excessive losses over the past three years; in certain geographic areas property rates are taking 20% increases (my wife is a large property insurance broker so I get to see that part of the industry first-hand), in areas such as the Ohio Valley region.

    I encourage you to visit your business plans and anticipate rate increases for the next few years even for clean (loss free, mature operations) accounts. Those of you with loss control problems, I suggest that you change your chauffeurs behavior yesterday.

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    But Phil!!!!!
    Tim Wiegman, Jr.
    Boulevard Limousine
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    Serving Kansas City, Lawrence, Topeka
    http://www.BoulevardLimoKC.com - Kansas City Limos
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