Unfortunately, insurers also face these inflationary challenges. As they assess the impact on their investment portfolio, earnings and returns, what has already been a challenging insurance market over the past few years may face further difficulties – including premium increases.
The cost of claims in this environment is directly impacted by the cost of replacing damaged property, increased business downtime, health care costs and general litigation costs.
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 overall responsibility rating
Many food and beverage manufacturers are forced to pass on the increased costs to consumers, increasing their revenues. However, this does not always paint a true picture of the exposure assumed by the insurance companies. The problem is that insurers have traditionally associated an increase in revenue with an increase in risk exposure. But in some cases, the volume of product produced may increase only modestly, compared to a much larger increase in revenue.
One possible solution and way to create more stability, predictability and consistency in pricing is to consider changing the rating base of your general liability policy. Companies currently measured by revenue may consider the viability of moving to a unit of measure that more accurately reflects their true production exposure, such as weight or units produced.
Take a berry processor for example. Facing inflationary pressures, the company could see its revenue grow by 20% a year as it passes on increased production costs to its customers. However, this increased revenue may come from processing the same number of berries as the previous year. The actual amount of product exposure in the market has not changed. By shifting the rating base 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 of inflationary price increases.
Proactively negotiate with your conveyancer when reassessing property values
The cost of building materials, such as lumber and drywall, has increased. Supply chain challenges and labor shortages are slowing the rebuilding of companies that have dealt with property loss. These factors cause insurance companies to assess property values more carefully and in many cases require policyholders to increase their insurance values.
If insureds are unwilling to comply or do not report values, they may face penalties in the form of co-insurance at the time of loss. This could end up costing them more – at a time when they are trying to cut costs.
We suggest you proactively approach this topic well in advance of your upcoming renewal. Think about your current values – have they changed in the last few years? Have you considered the impact of supply chain disruptions on your business interruption limit? Do you have a backup plan for securing equipment and machinery if your usual supplier is unable to meet your schedule? Many food and beverage companies require specialized machinery, often shipped from overseas, with long lead times. Having an on-site backup can significantly reduce downtime and business interruption losses.
Once the exact values are determined, make sure your broker negotiates with your insurance carrier to manage your property prices. As values increase, increasing exposure will increase your premium. However, your broker should negotiate to keep your rates flat or down 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, companies that practice strategic risk management and proactively work to prevent losses will be viewed in a more favorable light by insurers. This means that they will receive more favorable premiums than those who do not have control and have an unfavorable loss history.
That’s not the only benefit. As mentioned earlier, during periods of high inflation, claims become more expensive. If companies are looking for ways to reduce their insurance costs, avoiding claims is certainly a good way to do so.
For example, assess areas such as your vehicle and fleet safety policies. Provide annual driver education and training, establish a driver qualification program to ensure your drivers have good records, and have a robust wireless policy to prevent distracted driving, a major cause of traffic accidents.
Review Your Deductibles/Deductibles – Are you willing to self-insure more risk?
As insurance companies evaluate the appropriateness of insurance retentions and deductibles to combat increased inflationary claims costs, policyholders may choose to increase their retentions/deductibles. This can sometimes be a good way to limit premium increases if the company wishes to retain more risk.
For example, let’s say you have a $50,000 deductible on your property policy. You might consider a $100,000 or $250,000 deductible option to lower your premiums.
Typically, the five-year delta return is a good rule of thumb when determining whether the change makes sense (ie, if going from a $50,000 to a $100,000 deductible saves $20,000 in premiums per year, then over five loss-free years, you’d save $100,000) .
This may not work in all situations, but it is always worth evaluating 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 affect your business. Working with the right broker who understands the challenges food and beverage companies face and who can provide proactive and creative solutions can help limit your insurance costs.