A buyer of insurance or a seller of risk?


A buyer of insurance or a seller of risk?


Risk managers and CFOs need a plan when approaching the commercial insurance market that will set them apart from the crowd of insurance buyers, says Ryan Ralston from Elevate Risk Solutions.

In any insurance market, the people responsible for protecting their companies through the purchase of insurance require a competitive advantage. This is particularly true in hard markets.

Asking the standard question: “How much for your insurance?” will trigger standard responses: “These are our best terms” and “That is our filed rate”. But insurers and their underwriters do make exceptions—applying rating discounts, modifying endorsements, increasing sublimits, etc.

“This risk manager will consistently beat the market, regardless of what company she works for, or which set of risk exposures she must deal with.”

These exceptions are made to satisfy their best clients and the most attractive risk profiles. The best accounts are those that the insurance companies must compete on to win the business.

“Best” clients. “Attractive” risks. “Win” the business. The implication is that, while there is a disciplined underwriting process, there must be a ranking system that grades insurance buyers and their risk portfolios.

The opportunity is there, for those with an advantage, to move to the top of the list. Risk managers and chief financial officers (CFOs) who consistently outperform their peers and who ask for exceptions capture better-than-market rates and coverage terms. 

What is their secret?

The answer is remarkably straightforward. It is not what company they represent, how many professionals they have on staff, or the size of their risk management budget—although those factors certainly can help. The key difference is their mindset—the way they prepare and approach the market.

These leaders do not fill in insurance applications and throw them over the fence to the broker, who then goes to the insurance market on their behalf. They do not sit in their office waiting for an invoice to see how much their premiums went up.

They have answered the question: “Are you a buyer of insurance or a seller of risk?”

The risk managers at the top of the list sell their risks directly to the underwriters and insurance company leaders, where possible. At conventions, over the phone, in person, and especially at their place of business, they have a process in place to heavily market their company and their plans to manage risk.

Imagine a Shark Tank episode with a CFO or risk manager pitching their insurance renewal to the sharks. Instead of the typical venture capitalists, the sharks are top insurance company executives, representing different companies. They are ultimately responsible for driving their companies’ profits, and are competitive and hungry, with capital to put at risk for the best clients. These executives decide what to insure, at what price, and on what terms.

A well-groomed and well-prepared professional calmly presents her business model. No pop-up celebrities, no fancy packaging, no free samples. She paints a picture for the sharks of the risks her company faces, how exposed they are to certain perils, how unprepared they are for catastrophic events and how low deductibles have discouraged them from taking ownership of their risk.

She spends time quantifying the risk, explaining what could go wrong and how bad it could get. The sharks shift in their seats, disturbed by the exposures and yet curious about why she’s providing so much detail and quantification. The least experienced shark interrupts the presentation: “I’m out.”

The risk manager skillfully and purposefully moves to the next level. She takes time to explain what the company is doing to transfer, mitigate, and manage these risks. With great detail she illuminates the company’s risk management strategy, including investments in risk reduction and loss control; education on risk management for executives and line employees; premiums allocation changes purposed to align incentives; contractual risk transfer; tracking of leading indicators for potential loss; claims handing; and risk ownership.

The sharks lean forward. They like what they are hearing. It makes sense. The sharks eye one another, sizing up the competition for this account.

The risk manager again shifts gears. She describes the captive insurance strategy: the company will now own a captive which will compete with the insurers on every programme. The presenter reveals that the captive will be aggressive, as its administrative cost will be less than 10 percent, whereas commercial insurers carry a burden of 30 percent or more.

The captive will be in position to aggregate risk and have direct access to reinsurers, thereby reducing transactional cost. The savings will be shared with the company. The captive will retain increased retentions through a combination of direct policies and fronted policies. It will offer internal divisions various coverage options and deductibles, based on their compliance level with company risk policies.

Droplets of perspiration form on the brows of the sharks. They all want a piece of this account, and the pie just got smaller as the captive will take premium off the table. This approach will win a spot at the top of the list. The sharks will aggressively go after this business, and will make exceptions in order to secure it. The risk manager will walk out with a very competitive insurance renewal. 

The captive solution

Did she buy insurance? No. She sold the risk to the lowest bidder with the best terms.

You may notice she also introduced a new competitor—a new shark in the water: her captive.

A captive is a competing force that is controlled by the owner. The captive will help set pricing and terms and will complete programmes without having to bring in marginal (inexperienced) players, who often drive rates up and coverage terms down. Her approach—selling the risk, and introducing a captive strategy—became the competitive advantage.

This risk manager will consistently beat the market, regardless of what company she works for, or which set of risk exposures she must deal with. The approach is a proven risk management strategy, and is well respected by the risk management community and insurers alike.

A captive strategy, and a selling mindset, can make the difference between being an average insurance buyer or a star risk manager. 

Ryan Ralston is the managing director of risk management at Elevate Risk Solutions. He can be contacted at: ryan@elevaterisk.solutions

Ryan Ralston, Elevate Risk Solutions, Risk manager

Captive International