Advantages of a Risk Management Approach to Clients

For a broker interested in writing and retaining commercial accounts, there is a lot to be said for conducting a thorough review of a business owner’s operations, making recommendations for appropriate limits and types of coverage, and then ensuring that the client understands what is – and isn’t! – covered under the insurance programme he or she selects. A broker who regularly engages in this type of comprehensive review will be a broker that stands out from the crowd and who should therefore enjoy greater success in sales. In addition, this risk management approach to clients can help shield a broker from an Errors & Omission (E&O) claim.

A recent study by Harris Poll Online in the United States revealed that, among other things, 66% of the small business owners surveyed said they did not have business interruption coverage. It’s always dangerous to draw conclusions for Canada based on survey results from another country, even results from our neighbour south of the border. But, even if a similar survey conducted in Canada elicited a similar response from small business owners, I would have difficulty believing that two-thirds of the insurance programmes actually lack a business interruption component. What seems more likely is that two-thirds of the owners think their programme lacks business interruption coverage. Many if not most small businesses would be covered under a package insurance policy that automatically provides some measure of business interruption coverage. Whether the automatic coverage is sufficient is another question, but at least some coverage is there. If the owners aren’t aware that this basic and crucial coverage is there, it’s because no one has sat down with them to discuss coverage and to determine appropriate limits.

Earlier in my career, I worked for an insurance company that sold niche, commercial insurance on a direct basis to business owners. The company’s mandated procedure when quoting on a new account, and then at every subsequent renewal, was to sit down with the business owner to review coverage and limits. A form was filled out that detailed the coverage and limits that were being purchased as well as the coverage that was being declined. At the end of the meeting, the client would sign the form. A copy of that form was then placed in the client’s file. One of my clients was the owner of a mid-sized company that had been in his family for a few generations. Every year, I reviewed coverage with him and, every year, he declined to purchase business interruption coverage. I didn’t go through this process because it was my brilliant idea: I did it because it was a mandated procedure. As luck would have it, one day this particular client suffered a devastating fire that destroyed the building and contents. When my sales manager visited the business owner to console him on the damage to his business and to help him in the preliminary stages of preparing his claim, the owner of course regretted not purchasing business interruption coverage when he had the chance. But at least he knew and acknowledged that he had been offered coverage.

As things turned out, that business never re-opened after the fire. Sadly, this is all too common. According to the Federal Emergency Management Agency (FEMA) in the United States, 40% of businesses do not re-open after a disaster and another 25% fail within one year. Along the same lines, the United States Small Business Administration reports that 90% of businesses fail within two years of a devastating loss. Although these are U.S. statistics, my sense is that the results for Canadian small businesses would be no better.

This company that I worked for at the time did not present itself to the market as the cheapest provider of insurance. There were definitely lower-cost providers. The reason business owners purchased insurance from this company, rather than its competitors, is that they knew the company understood its clients’ businesses, designed customised insurance programmes to meet those needs, and took the time to meet with clients on a regular basis throughout the year in order to stay on top of their clients’ evolving needs. The business owners knew they could almost certainly obtain a cheaper programme elsewhere, but they wouldn’t take the risk of being improperly advised.

There is a lesson for all of us, I think, in this. Based on my experience, anyone looking to build up a portfolio of commercial business, to maximise commission income, and to minimise the exposure to an E&O claim, is well advised to take this kind of risk management approach with current and prospective clients.