Unfortunately, insurance companies also deal with these inflationary challenges. As they evaluate the impact on their investment portfolio, income and returns, the insurance market, which has already been challenging in recent years, may see further difficulties – including rising premiums.
Claim costs in this environment directly affect the cost of replacing damaged property, extended downtime, health care costs, and overall litigation costs.
While food and beverage companies are already dealing with increased costs in many areas, how can they proactively manage their insurance costs related to these inflationary trends?
Change your general liability rating basis
Many food and beverage manufacturers are forced to pass on increased costs to the consumer, which increases their profits. However, this does not always provide a true picture of the exposure as underwritten by insurance companies. The problem is that insurers have traditionally associated increased revenue with increased risk exposure. In some cases, however, the volume of product produced may increase only slightly compared to a much larger increase in revenue.
One possible solution and way to create more stability, predictability and consistency in pricing is to discuss changing the rating basis of your general liability policy. Companies currently valued by revenue may consider the viability of moving to a unit of measure that more accurately reflects their actual production exposure, such as weight or units produced.
Take a berry processor for example. Due to inflationary pressures, the company may see a 20% increase in sales year-on-year, as it will pass on the increased production costs to its customers. However, these increased revenues may come from processing the same number of berries as the previous year. The actual market exposure of the product has not changed. By shifting 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 effects of inflationary price increases.
Be proactive with your carrier when reassessing property values
The cost of building materials such as lumber and drywall has increased. Supply chain challenges and labor shortages are delaying the rebuilding of companies that have dealt with asset losses. These factors lead insurance companies to assess property values more closely and in many cases pressure policyholders to increase their insurance values.
If policyholders are unwilling to comply or show lower values, they may face penalties in the form of co-insurance at the time of loss. This can end up costing them more – at a time when they are trying to reduce their costs.
We recommend a proactive approach to this topic well in advance of your upcoming renewal. Consider your current values – have they changed in the last few years? Have you considered the impact of supply chain disruptions on your business disruption limit? Do you have a backup plan in place to obtain equipment and machinery if your usual supplier is unable to meet your schedule? Many food and beverage companies require specialized machinery, often sourced from abroad, with long delivery times. Creating a backup could significantly reduce your downtime and business interruption losses.
After determining the exact values, make sure your broker negotiates with your insurance carrier to manage your property prices. As the values increase, the increase in exposure will lead to an increase in your premium. However, your broker should negotiate to keep your rates the same or lower even if your values increase significantly.
Practice strategic risk management
This is true at any time, but as insurance companies grapple with increased claims costs due to inflation, underwriters will view companies that practice strategic risk management and proactively work to prevent losses in a more favorable light. This means that they will receive more favorable premiums than those that are lax in their controls and have an unfavorable history of losses.
This is not the only advantage. As already mentioned, in periods of high inflation, receivables become more expensive. If companies are looking for ways to keep insurance costs low, avoiding claims is certainly a good way to do it.
For example, evaluate areas such as your vehicle and fleet safety policies. Provide annual driver training and education, create a driver qualification program to ensure your drivers have a good record, and implement a robust wireless policy to prevent distracted driving, a leading cause of traffic accidents.
Check Your Deductibles/Retainers — Are You Willing to Insure Higher Risk?
As insurance companies assess the appropriateness of insured retentions and deductibles to combat the increased costs of claims inflation, policyholders may choose to increase their retentions/deductibles. This can sometimes be a good way to limit premium increases if the company is willing to retain more risk.
For example, let’s say you have a $50,000 deductible on your home insurance. You may consider taking a $100,000 or $250,000 deduction to lower your premiums.
A five-year delta return is usually a good rule of thumb for determining whether a change makes sense (ie, if going from a $50,000 deductible to a $100,000 deductible saves $20,000 in premiums per year, then over five years without a loss, you’d save $100,000 $).
It may not work in all situations, but it’s always worth considering as a way to control premium increases.
Specialized experts help you control costs
During this challenging inflationary environment, it is important to spend time thinking about insurance costs and how they affect your business. Working with the right broker who understands the challenges food and beverage companies face and can provide proactive and creative solutions can help reduce your insurance costs.