Unfortunately, insurers are also dealing with these inflationary challenges. As they evaluate the impact on their investment portfolio, income, and returns, what has already been a challenging insurance marketplace over the last few years may yet see further difficulties—including premium increases.
The cost of claims during this environment is directly affected by costs to replace damaged property, increased business interruption periods, costs of healthcare, and overall costs associated with litigation.
So, while food and beverage companies are already dealing with increased costs in many areas, how can they proactively work to manage their insurance costs related to these inflationary trends?
Change Your General Liability Rating Basis
Many food and beverage manufacturers are forced to pass increased costs on to the consumer, which is increasing their revenues. However, this does not always paint a true picture of the exposure as underwritten by insurance companies. The problem is that insurers traditionally associate an increase in revenue with an increase in risk exposure. But in some cases, the volume of product being produced may only be up modestly, versus a much larger increase in revenues.
One possible solution, and a way to create more stability, predictability, and consistency of pricing, is to discuss changing the rating basis on your general liability policy. Companies currently rated on revenues can consider the viability of changing to a unit of measurement that more accurately reflects their true production exposure, such as weight or units produced.
Take a berry processor, as an example. Facing inflationary pressures, the company might see its revenues increase 20% year over year as it passes increased production costs onto its customers. However, those increased revenues might come from processing the same number of berries as the previous year. The actual amount of product exposure in the marketplace has not changed. By moving the rating basis from revenue to pounds produced, the company may be able to achieve a more accurate rate and premium for its exposure—and avoid some of the impact from inflationary price increases.
Proactively Negotiate With Your Carrier When Reassessing Property Values
The cost of construction materials, such as lumber and drywall, have increased. Supply chain challenges and labor shortages are delaying reconstruction for companies that have dealt with a property loss. Those factors are driving insurance companies to assess property values more closely, and in many cases, pushing for insureds to increase their insured values.
If insureds are unwilling to comply, or are underreporting values, they may face penalties in the form of coinsurance at the time of loss. This may ultimately cost them more—at a time when they’re trying to reduce their costs.
We suggest a proactive approach to this topic well in advance of your upcoming renewal. Consider your current values—have they changed over the last few years? Have you contemplated the impact of supply chain disruptions on your business interruption limit? Do you have a backup plan in place to source equipment and machinery if your usual supplier is unable to meet your timeline? Many food and beverage companies require specialized machinery, often sourced from overseas, with long lead times. Having a backup in place could significantly reduce your downtime and business interruption loss.
Once accurate values are determined, be sure your broker is negotiating with your insurance carrier to manage your property rates. With an increase in values, an increase in exposure will drive up your premium. However, your broker should be negotiating to keep your rates flat, or down, even if your values are increasing significantly.
Strategic Risk Management Practice
This is true at any point in time, but as insurance companies grapple with increased claims costs due to inflation, companies that practice strategic risk management and proactively work to prevent losses are going to be seen in a more favorable light by underwriters. That means they’ll receive more favorable premiums than those who are lax in their controls and have an unfavorable loss history.
This is not the only benefit. As previously mentioned, during periods of high inflation, claims become more expensive. If companies are looking for ways to keep their insurance-related costs down, avoiding claims is certainly a good way to do that.
For example, evaluate areas such as your vehicle and fleet safety policies. Provide annual driver training and education, establish a driver qualification program to make sure your drivers have good records, and have a robust wireless communication policy to prevent distracted driving, a major cause of vehicular accidents.
Review Your Deductibles/Retentions—Are You Willing to Self-Insure More Risk?
As insurance companies are assessing the appropriateness of insured retentions and deductibles to combat increased inflation costs from claims, insureds can elect to raise their retention/deductible. This can sometimes be a good way to contain premium increases if the company is willing to retain more risk.
For example, let’s say you’re carrying a $50,000 deductible on your property policy. You might consider looking at a $100,000 or $250,000 deductible option to reduce your premiums.
Typically, a five-year return on the delta is a good rule of thumb in determining if a change makes sense (ie, if moving from a $50,000 to $100,000 deductible saves $20,000 on premiums annually, then over the course of five loss-free years , you would save $100,000).
This may not work in all situations, but it is always worth assessing as a way to control premium increases.
Specialized Experts Can Help You Control Costs
During this challenging inflationary environment, it is important to spend time thinking about your insurance costs and how they are impacting your business. Working with the right broker who understands the challenges food and beverage companies are facing, and who can provide proactive and creative solutions, can help contain your insurance costs.