Commercial property and casualty insurance premiums are usually significant expense items in a club’s budget. As such, it is beneficial for clubs to diligently evaluate the options available to them in the marketplace and have a process in place that will yield the best outcome. Since 2008, more clubs are taking in-depth looks at their current carriers and brokers; claims and risk services; cost to value coverage options; and, the most efficient process to get the most from the insurance marketplace at renewal time.
Regardless of economic conditions, club governance should dictate the buying process for the purchase of commercial property, casualty and other types of insurance. These guidelines will help to alleviate undue pressure on club members, volunteers and club personnel in addition to helping to avoid conflicts of interest.
The marketing of commercial insurance is a time consuming process. As such, some clubs opt to hire an outside insurance risk manager and purchasing consultant to assist in the buying process. This is especially helpful if a club does not have a process in place or the necessary human capital available. Consultants often offer a menu of services and set fees for clubs that range from complete management of the process including RFP development, interviewing and broker/carrier selection to coverage review or à la carte items of the overall process.
This article will provide direction on developing purchase process guidelines, and the effective execution of a plan. Additionally, it will touch on what clubs should expect from brokers and the marketplace and what clubs should require of its brokers and carriers.
The First Step: What to Look for and What to Ask
If a club is starting the process from scratch, it is recommended that they interview 3–5 insurance brokers (approximately 120 or more days from the policy expiration date) to identify which brokers are the best fit for the club. Will they work well within the club’s culture? Are there conflicts of interest with a broker, like the involvement of a member or friend in the decision-making process?
Clubs should look at a broker’s overall insurance experience, specific club expertise, knowledge of the current club insurance marketplace, and the insurance agency personnel that will be involved in the account and their relevant experience. It’s always a best practice to do reference checks.
The club should ask questions related to how claims are handled, and who will be their claim and risk control contacts within the agency. Effective communication between the club, broker and the carrier is vital to overall cost containment for insurance buyers. For example, in the case of an injured worker, it is important for the claim to be reported in a timely manner and for the club to notify the broker and carrier if they believe the injury was unjustly claimed. The broker should provide oversight of the claim adjuster to keep claims fresh, monitor medical contact and more. Also, programs that are in place such as Safety Committees, Return to Work and Light Duty can save thousands of dollars in claim costs. It should be expected that brokers consistently discuss these topics with those they insure.
The Selection Process: A Game of Numbers
After interviewing three to five brokers, the club should look to narrow the field to one, two or three to go through the competitive process. If one broker is significantly stronger than the others, and has a proven track record of success with clubs, it may be best to allow one broker to represent the club in the marketplace.
If the club has confidence that there are two brokers who have effective knowledge of the club insurance marketplace, a proven track record with clubs, and a demonstrated commitment to work diligently on the club’s behalf, then working with two brokers is recommended.
If there are more than two brokers, the ability to leverage the marketplace on a club’s behalf can get diluted. If a club wishes to utilize more than two brokers, three may be acceptable but any more than three will cause issues, as there are a limited number of underwriting partners in the club insurance industry. Some clubs prefer to have the brokers’ race to the markets, but this can be an inefficient and frustrating model.
A market selection process provides the club with the best options. In this approach, the brokers submit a list of their most favorable markets or carriers to the club in order of preference. The club then assigns the markets—this is done similarly to a sports draft. It is important that the brokers list their market preferences not just for package lines of coverage, but also for workers’ compensation, directors and officers, environmental and umbrella lines of coverage. This can be a complicated process and it is important that all parties identify the names of the underwriting markets correctly in order to avoid confusion.
The Underwriting Process
Now that the club has selected two or three brokers and markets have been assigned, it is time to gather the underwriting information. This should take place within 70–90 days of the expiration date. If working with a consultant, he or she will put out a request for proposals on behalf of the club. If the club is managing the process on its own, it will more than likely get the most comprehensive proposals by allowing brokers to review all existing insurance policies. Some buyers are uncomfortable with this part of the process, as they prefer not to disclose existing premiums and coverage. If that is the case, it may be best to share the coverage with the broker but block out the pricing portions of the policy. By providing this access, the club should expect that experienced brokers would develop a solid base for the application to the marketplace and also a detailed coverage analysis at proposal time. In addition to policy access, the club will need to provide additional updated information to the brokers including financial statements, new amenities and programs, payrolls and revenue, lists of carts and equipment and property values (building, contents, fine arts), which may have changed due to renovations, appraisals and more.
In addition to items that the club has immediate access to, the club often needs to complete supplemental applications for a commercial package, directors and officers, workers’ compensation and environmental coverage. While no one likes to complete applications, it is a pertinent part of the process that all insurance carriers will request and should be completed in a timely manner to keep the process moving forward. For a club to meet all of these requests, it could mean completing 10 or more applications.
Communicate with the brokers and ask that just one application for each line of coverage be required, as this should meet most carrier and broker needs and be the most effective use time. That being said, this process often creates a bit more back and forth questions from the underwriters than if the club completes all of the carrier’s supplemental applications.
Another significant step in the underwriting process is sharing the club’s most recent loss experience. These documents should provide information on the club’s claim activity from their respective carriers insuring them over the last 4-5 years. The insurance underwriters, in most cases, will require that these claim reports be directly provided from the previous insurance carriers and that all past claim activity be currently valued—meaning that the reports, regardless of how old, be valued from the previous insurance carriers within the last 90 days. Why is this? This is due to claims that may have occurred but may not have been reported prior to the claim reports last valuation. Also, underwriters could see a sizable claim with an open reserve from a year or two in the past and may want to see if the claim had been settled, and if so, for an amount lower or higher than the original reserve.
Timelines
The overall recommended timeline is as follows:
- 120 days for broker/market selection;
- 90 days to provide broker access to review policies;
- 50–60 days to provide broker with underwriting information.
In looking at the last step, once the club has provided brokers with the requested underwriting information, clubs should be prepared for additional questions regarding club operations, steps taken to avoid future claims, and responses to previous loss control recommendations, etc.
If the club is working within the recommended timeline, all carriers will have ample time to provide proposals to the club. It is important that the club and broker have effective communication 30-60 days prior to the expiration date to make sure all information is provided and to make sure the broker is putting the necessary pressure on the underwriters to meet proposal timelines. The club should provide a clear picture to the broker detailing the time the club requires to receive the proposals, pull together decision makers and make a final decision. A fair timeline for all parties would be for a club to receive their proposals 20 days in advance of their expiration date. This provides enough time for brokers to respond to the club’s questions during or after the presentation or to discuss enhancements or changes to the proposal. It should take no more than five days for the carriers to respond if needed. The club will then have 15 days to finalize a decision, which should provide ample time to have insurance and finance committees and/or club boards approve the decision, if required. In most instances, the timeline does not work out this efficiently due to conflicting schedules, delays in requesting and receiving information, underwriting workload and other obstacles. However, by working in advance and communicating expectations with one another, this can be an effective process to meet time requirements.
SIDEBAR: MARKET EXPECTATIONS AND CYCLES
Commercial property and casualty insurance premiums typically run in market cycles, referred to as hard and soft markets. In soft markets, there is downward and competitive pressure on pricing, coinciding with more liberal underwriting guidelines and the ability for buyers to obtain enhanced coverage options from the underwriters. In hard markets, we see opposite trends and more significant pricing increases. In the last 25 years, the industry has been through a few of these cycles:
- From 1986 through 1989, commercial insurance buyers saw yearly premium increases of 20 to 40 percent in conjunction with coverage restrictions. These market conditions did not last long.
- From 1989 to 1999, there was consistent downward pressure on pricing, where buyers were receiving 5 to 15 percent premium decreases each year, while also obtaining coverage enhancements.
- From 1999 to 2001, pricing and coverage seemed to reach a flattening period, and the leading carriers began to seek moderate price increases of 3 to 7 percent.
- In 2001, the industry experienced its first true hard market since 1986, which can be attributed in part by the September 11th terrorist attacks. This hard market lasted into 2005. Another soft market began at the end of this hard market cycle and continued into present day.
SIDEBAR: PRIVATE CLUB OUTLOOK FOR 2014
So where are we now? For the past year or so, the industry has found itself in a similar position as it was from 1999–2001. Commercial premiums are increasing moderately, and restrictions on coverage are becoming more common. Property/casualty premiums increased 4.4 percent in the U.S. in 2012, and are expected to continue to climb as markets harden.
Looking at clubs today, typical increases have been in the two to 10 percent range for accounts that have performed well to fair from a claims standpoint. Accounts that have underperformed have seen more significant increases. The club industry premium rate increases expected for 2014 fall in line with the general commercial insurance property/casualty markets as follows:
Property – 10 percent (more if there has been claim activity or if the club is located in an area prone to catastrophic weather patterns). The club industry is also seeing coverage restrictions on outdoor property coverage, golf course and tree coverage with lower limits, higher deductibles and wind and other peril restrictions.
General Liability/Automobile – Five percent.
Directors’ and Officers’ – 10-15 percent. Clubs are seeing these rates increase, along with higher deductibles for employment practice coverage, due to industry claim activity and other factors.
Workers’ Compensation – Insurance industry publications are touting rate inadequacy for this line of coverage ranging from 10–30 percent nationwide. That being said, factors such as industry class, state specific guidelines, a club’s claim experience, experience modification, and a new underwriting player or two jumping into a specific market, has renewal pricing more inconsistent for this line of coverage. In general, premium increases are common in all parts of the country for workers’ compensation with carriers typically seeking a five percent or more increase.
Bill Dalton is president of Bridgepoint Insurance Group, a specialty property & casualty insurance brokerage located in Wayne, Penna., with a focus on the golf and club industry. You can reach Bill at [email protected] or 888-687-5712 x223. See their website at www.bridgepointins.com.