Insuring Some Cost Savings

The metal market is at historical lows and more than ever there is an increased emphasis on reducing overhead costs in order to minimize the shrinkage of profits during this difficult period. Are you one of the many who are interested in increasing profitability by significantly cutting one of your largest overhead costs? You may be surprised at how much you can save on your cost of insurance, if you know how. The insurance market has never been more competitive. The goal of this article is to help provide you with the tools and knowledge to maximize your cost savings, as well as how to choose the right insurance broker to help you navigate the maze of cost reducing possibilities.

Similar to your accountant and your lawyer, an experienced insurance broker can play a vital role in protecting the assets of your business. However, the right broker can also benefit your business by finding creative ways to significantly cut your cost of insurance. Would you like to slash your workers’ compensation premiums by half? How about reducing your cost of auto insurance by half?

Other metal recyclers have taken advantage of these savings, why shouldn’t you? Depending on the location of your business, savings such as these may be available to you as well. The metal recycling industry is not the only industry experiencing a “soft market.” Insurance premiums are at all-time lows and your business should be taking full advantage of the potential savings.

The most critical thing to remember, when marketing your insurance policies, is that you do not have to reduce insurance protection, in order to experience significant savings. The last thing you want to do is endanger your personal and company assets. What good would the savings be if you lost your business due to the reduction of your level of protection? The goal of any good broker should be to cut your cost of insurance and at the same time increase your insurance coverage.

The three insurance coverages which provide the most opportunity for significant premium reductions are workers’ compensation, commercial auto and commercial general liability. These comprise the bulk of any metal recycler’s total premium outlay. Changes in workers compensation laws and managed care have pushed losses down, resulting in lower rates.

In states such as Texas, there have been tremendous reductions in premiums. In 1996 the Texas “benchmark” workers’ compensation insurance rate for class #8265 “Iron Or Steel Scrap Dealer” was $30.86 per $100 of payroll. In 1997 the rate was reduced to $20.06. Effective January 1, 1999, the rate has fallen to $14.77. This is a 48% drop in just three years! Of course once you include both the potential credits offered by the insurance carriers, and your experience modifier (if applicable), the net rates might be considerably lower. Although the “benchmark” rates are outside of the brokers control, the credits offered by the insurance carrier, known as “schedule credits,” are in large part a direct result of your insurance broker’s ability to access the most competitive insurance markets and his ability to negotiate the best possible credits. Having an experienced broker working on your behalf and matching your business with the right insurance carrier can mean the difference in literally thousands of dollars in savings.

Consider the example of the scrap metal recycler who had just renewed his workers’ compensation policy with his long time agent/friend for $111,000, when a broker specializing in recycling, asked for the opportunity to offer a proposal. This specialty broker was able to reduce the customer’s workers compensation premium to $51,000. Needless to say, he was awarded the business. At the next renewal, the broker was able to lower it even more to $40,100. The first broker was not incompetent, he simply did not have the tools or the knowledge to acquire this level of savings for his customer. The specialty broker was able to access multiple insurance markets, creating a competitive environment between the most competitive and specialized markets, and was successful in negotiating a sizable credit for his customer, as well. Though the amount of savings available will vary from state to state and your savings may not be so dramatic, it does pay to work with a broker who specializes in your industry.

In another recent case, a scrap metal dealer was paying an additional +40% debit “schedule modifier” on his workers compensation policy. Again, this customer had not marketed his insurance in several years. He had blindly trusted that his longtime agent was able to acquire the lowest pricing available. A specialty broker was able to acquire coverage for this business with a -20% credit, replacing the +40% debit he had previously. This is a 60 point swing in premiums, benefiting the customer.  The benefits of using the specialty broker did not end there. The broker was successful in negotiating with the previous insurance company in having the +40 debit removed from the expired policy and obtaining a sizable refund for his customer. From these examples, you can see how using a broker, who understands the recycling industry, can pay great dividends.

Commercial auto insurance offers similar savings opportunities, especially if you maintain a large fleet of trucks. Historically, insurance carriers have not offered their most competitive pricing on this line of insurance coverage. They felt the exposure was too great for the amount of premium they were able to collect. However, times are changing. Depending on the individual state and claims history, auto premiums may be reduced 30% to 40%, if you are matched with the correct insurance carrier. 

Regarding commercial general liability (CGL), the key to saving premiums seems to be your broker’s and insurance carrier’s level of understanding of the intricacies of your business processes. Recycling is a very diverse business. Even within the classification of “Metal Scrap Dealer,” most dealers’ operations will vary greatly. Do ferrous or non-ferrous metals constitute the bulk of your sales? Do you have smelting operations? Do you dismantle autos? Do you cut down rail cars? Do you handle batteries or tires?

Answers to these questions, among many others, will enable your broker to accurately classify your business to maximize your premium savings. Take for example the broker who listened to his customer’s (specializing in aluminum) complaint that it was unfair for his policy to be based on the same rate per $1,000 of gross sales as a dealer who specializes in ferrous metals. His contention was that the higher price of aluminum inflates the gross sales figure and results in inflated premiums as well. The broker was successful in having the insurance carrier adjust the aluminum sales figures, which evened out the discrepancy. This adjustment greatly reduced the aluminum recycler’s CGL premium.

Although words like “cost,” “price,” “premium,” etc. monopolize most of our attention these days, we need to be careful not to allow insurance to become a commodity—something that is driven solely by price. There is too much at stake to allow this to happen. The life and continuity of your business is at stake. After all, isn’t that what you purchase insurance for in the first place? Even more important than the premium savings, a quality insurance program can provide your business with the security of maximum insurance protection.

Who hasn’t heard of a multi-million dollar sexual harassment lawsuit these days? You may be thinking that a lawsuit of this kind is not an exposure for your business. Think again! Industries, historically dominated by men, such as recycling and construction, are experiencing a growing number of employment practices liability claims, including sexual harassment, wrongful termination, discrimination, etc.  Do you realize that you most likely do not have insurance coverage this type of a claim?  Filing Chapter 11 as a defense against such suits is not an attractive alternative, yet many companies have found themselves in just such a position.

Employment practices liability is not the only exposure to your business that may not be addressed by your current insurance program. Do you realize that the contract you signed last week, accepting liability on a particular issue, may not be covered by your insurance policy? Would you suffer a substantial loss of income if your only aluminum shredder was to experience a sudden and accidental breakdown? And does your current insurance policy provide coverage for this lost income? Considering that your equipment is becoming more and more dependent on electronics and computerization, have you reviewed how your policies would respond to an electrical surge and the resulting damage to your equipment? Does your broker understand “bad melt” coverage? Does your policy cover it? How about contingent strike coverage?

One of the most controversial issues in virtually all industries is pollution liability. Most CGL policies totally exclude pollution. A few quality companies, such as Wausau’s “Recycleguard” program provide pollution coverage for sudden and accidental cleanup as well as third party liability. Recycleguard’s program manager, Brooks Chase, warns that “recyclers must be careful to fully understand what they are getting when they are told that their policy includes pollution.” Chase states that “many policies contain a reduction of the defense and aggregate limits, while others contain reduced limits on both cleanup and third party liability.” According to Chase, it would be worthwhile for any recycling business to have their insurance professional obtain a separate, stand alone pollution proposal for consideration. This policy would greatly enhance and add to any pollution coverage contained in your CGL policy. If you have not looked into this type of coverage in the past twelve months, you may be surprised at how affordable this coverage can be. Insurance carriers such as Wausau, CNA, Kemper and AIG are all worth considering.

Recognizing that there is a tremendous savings potential in the insurance marketplace and having a genuine concern for the many exposures that threaten your business, how do you put all the right pieces together for both maximum protection and savings?

The most effective method is to allow for competition in the marketing of your insurance policies at renewal. Competition will insure that you receive the very lowest pricing from the very best insurance carriers. If you are considering marketing your policies, here are a few tips to make your effort more productive:

            Start early by allowing yourself at least 90 days to accomplish this project.

            Involve another broker besides your current one. Select a broker who specializes in your industry. Ask for references to verify that he has the expertise that you require.

            Level the playing field for each of the brokers by treating them all equally and fairly.

            Identify the key insurance carriers for the recycling industry. Only certain ones have the pricing and coverages you desire.

            Assign the top carriers to different brokers. This will prevent one broker from “blocking” the markets from other agents, only to promote his preferred carrier, which may not be the best one to fit your needs.

            Allow the brokers sufficient time with you to complete their applications and learn about your business. All brokers will need complete underwriting information, such as past claims history, estimated payrolls and gross sales, schedules of autos and equipment, etc.

            Identify what special services that the various brokers and carriers have to offer your business.

            Be sure to establish bid specifications for each broker to quote on, so that you will have an “apples to apples” comparison to review. Any variances should be indicated on a separate segment of the proposal for your consideration.

            Require that all brokers clearly state on their proposals what the pricing is based on. For example, this would prevent a broker from basing his quote on a lower gross sales figure, simply to gain a competitive advantage on his competitors.

Once you have reviewed the proposals and selected the best combination of broker and carrier, the real test begins. After the sale, does your broker disappear and does an assistant take over?  Does your broker personally deliver and review your policies with you or does he mail them to you? Does he conduct semi-annual reviews with you? Do they provide you with quick and efficient service on MVR’s, certificates, etc.? Does he conduct an in-depth and thorough renewal review? You want a broker who genuinely cares about your business and desires to partner with you in the protection of your company. The insurance carrier that you select should know your business and industry so their loss control representative can provide knowledgeable support and the claims staff can make informed decisions regarding the management of your claims.

Never before has there been such an attractive combination of premium savings, enhanced coverages and insurance expertise available to the metal recycling industry. Considering the depressed metal market, it could not have come at a better time. Take advantage of the soft insurance market now, before it hardens again and premiums begin moving back up. The beneficial impact it could have on the reduction of your overhead costs could be huge.

Ron Hallmark is an account executive with Hibbs Hallmark & Co., a full-line insurance agency and third-party self-insurance administrator based in Tyler, Texas.