Contractors: Change How You Buy Insurance
Posted by Robert Phelan on Tue, Jan 12, 2010 @ 09:45 AM
Remember when we were kids (I'm 54 years old) we were told, "No swimming until 45 minutes after eating". I can remember having nightmares of getting a stomach cramp and helplessly sinking to the bottom of the lake if I ever dared ignore this rule. All of us can probably think of any number of dumb rules or behaviors we've been subject to that have no basis in fact.
If you are the person responsible for buying insurance for your construction company, I'm sure you follow this rule: Going out to bid regularly will save me money. A corollary to this is: The broker who comes up with the cheapest price is the best and therefore has "earned" my business.
Both of these are stupid rules. There are a number of reasons for this:
Commercial insurance is a cyclical business. On average, premiums go steadily down for 5-10 years and then there is a correction for 2-3 years until the cycle repeats itself. Most agents and brokers look like heroes during the down cycles because they bring you lower premiums every year. Here's the truth: they had nothing to do with it! You would have saved the money no matter what they did!
Agents and brokers don't really want to save you money. That's right. Read that again. They don't want to save you money. Why? Because every time they save you money they make less money. This is a case of misaligned incentives. They only want to save you money one time - the first year they get your business because you reward them for coming up with the lowest price. I can show you lots of proof of this. Right now we're at the end of a soft market. If you read the insurance trade journals, everyone is praying for the market to harden. That means you suffer more because your premiums go up and your broker makes more which is always their goal.
Here's the inside baseball on this. Talk to any underwriter and the smart ones all tell the same story. Attention to safety and controlling claims determines the premium for your construction insurance. Find a Risk Advisor who will help you with jobsite safety and contractor's risk management and you will always pay less than your unsafe competitors. Don't reward someone for getting lucky enough to pick the stupidest underwriter when you go out to bid. Reward the company who rolls up their sleeves with you every day and improves safety and prevents and manages claims.