Unfortunately, insurers are also struggling with these inflationary challenges. As they assess the impact on their investment portfolio, income and returns, what has already been a challenging insurance market in recent years could bring more difficulties – including premium increases.
The cost of damage in this environment is directly impacted by the cost of replacing damaged property, extended downtime, healthcare costs, and overall litigation-related costs.
While food and beverage companies are already grappling with increased costs in many areas, how can they proactively manage their insurance costs in the context of these inflationary trends?
Change your assessment basis for general liability
Many food and beverage manufacturers are forced to pass increased costs on to consumers, increasing their revenues. However, this does not always paint a true picture of the risk as painted by 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 products produced may increase only slightly, in contrast to a much larger increase in revenue.
One possible solution, and a way to create more stability, predictability, and consistency in pricing, is to consider changing the basis of your general liability insurance valuation. Companies that are currently valued by revenue may consider the possibility of switching to a metric that reflects their actual production load, such as mileage. e.g. weight or units produced.
Take a berry processor as an example. Amid inflationary pressures, the company could increase its revenue by 20% year over year as it passes on higher production costs to its customers. However, this increased revenue could come from processing the same number of berries as last year. The actual extent of product presence in the market has not changed. By shifting the valuation basis from earnings to pounds produced, the company can potentially achieve a more accurate rate and premium for its exposure – and avoid some of the impact of inflationary price increases.
Negotiate proactively with your carrier when revaluing real estate values
The cost of building materials such as lumber and drywall has increased. Supply chain challenges and labor shortages are delaying recovery for companies dealing with property damage. These factors are driving insurance companies to more accurately assess real estate values and, in many cases, are urging policyholders to increase their insured values.
If insured are unwilling to meet the requirements or understate values, they may face co-insurance penalties at the time of the 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 issue well in advance of your upcoming renewal. Consider your current values – have they changed in recent years? Have you considered the impact of supply chain disruptions on your business interruption limit? Do you have a backup plan to source equipment and machinery in case your usual supplier can’t keep up with your schedule? Many food and beverage companies require specialized machinery, often sourced overseas, with long lead times. Having a backup in place could significantly reduce your downtime and losses from business interruption.
Once the exact values are determined, make sure your agent negotiates with your insurance carrier to manage your real estate rates. As stats increase, an increase in exposure will boost your premium. However, your broker should negotiate to keep your prices flat or low, even if your values are rising significantly.
Practice strategic risk management
This is true at all times, but as insurance companies grapple with rising claims costs due to inflation, companies that strategically manage risk and work proactively to avoid claims are viewed in a more favorable light by insurers. This means they receive cheaper premiums than those who are lax in their controls and have an unfavorable loss history.
This is not the only benefit. As mentioned earlier, claims become more expensive in times of high inflation. When companies are looking for ways to keep their insurance-related costs down, preventing claims is certainly a great way to do it.
For example, assess areas like your vehicle and fleet security policies. Provide annual driver education and training, set up a driver qualification program to ensure your drivers have good records, and have a robust wireless communications policy to prevent distracted driving, a major cause of vehicle accidents.
Check Your Excesses/Deductibles – Are you willing to self-insure a higher risk?
As insurance companies assess the adequacy of insured deductibles and deductibles to combat the increased cost of inflation from claims, insureds may choose to increase their deductible/deductible. This can sometimes be a good way to curb premium increases if the company is willing to take on more risk.
For example, let’s say you carry a $50,000 deductible on your property insurance. You might consider a $100,000 or $250,000 deductible option to lower your premiums.
Typically, a five-year return on the delta is a good rule of thumb to determine if a change makes sense (i.e. if moving from a $50,000 deductible to $100,000 saves $20,000 annually in premiums, then over the course of five loss-free years, would save you $100,000).
This may not work in all situations, but it’s always worth considering to control premium increases.
Specialized experts can help you control costs
In this challenging inflationary environment, it’s important to think 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 offer proactive and creative solutions can help you contain your insurance costs.