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COLUMNN

Keeping a lid on insurance costs

By Wayne Kehl

Loggers right across Canada have seen some substantial increases in insurance rates over the last several years. Some parts of the country, such as Ontario, have seen triple digit increases for the trucking sector, which includes logging trucks. Independents and large outfits in the forest industry have both been hit hard by the increases.

Loggers and operators can take some steps to reduce risks and keep a lid on increases. But it might be helpful to look at why the increases are necessary in the first place. It’s true that insurance rates in general have gone up over the past year and are expected to rise in the coming years. But despite higher premiums, insurance companies are still providing very little return to their investors. How could this be? The main reasons for recent insurance price increases are:

• Extremely poor return on investments and lower interest rates.
• The incredibly high costs of the World Trade Centre disaster on September 11, 2001, which has had a huge impact on insurance claims reserves.
• The constantly increasing costs of insurance claims.
• Prior years underwriting losses due to premium discounting.

People are aware of the fact that world stock market investment markets have declined significantly over the past few years. What you may not be aware of is that insurance companies have survived almost exclusively on investment income for decades. Due to the competitive nature of the insurance industry, insurers have kept rates lower than the actual cost of doing business. The result has been an almost complete lack of profitability on insurance operations themselves. Insurance companies have not shown an “underwriting profit” since 1978.

Underwriting profit can be described simply as the difference between premiums collected and claims and expenses paid. Insurance companies typically pay out more in claims than they collect in premiums. In 2001, for example, insurance companies paid out $52 billion more in claims and expenses than they collected in premiums. How then can they survive, you may ask? In an effort to keep insurance rates at competitive levels, insurance companies have used investment income to keep themselves afloat.

The billions of premium dollars that flow through insurance companies annually have been invested in order to offset underwriting losses and create profit for investors. Rates were driven to extremely low levels. Insurance has been a bargain for many years—but that trend has come to an end. With the current downturn in investment returns and interest rates, underwriting losses have exceeded investment income to the point where many insurers are operating in a negative position.

This has created the need for increased premiums. Another major area of loss for insurance companies has been litigation on liability. The courts are often sympathetic to the complaints of individuals who decide to take on large national and international insurers. This is known as the “deep pocket” syndrome and it is driving the insurance industry into a virtual crisis, causing underwriters to avoid many classes of risk and finding themselves having to charge increasingly higher premiums on others. All of these costs are ultimately passed on to purchasers of insurance.

United States courtrooms are even less sympathetic to insurance companies than their Canadian counterparts. Manufacturers and wholesalers who ship product to the US and contractors and truckers who work in the US are finding insurance extremely expensive or difficult to purchase at any price. All of this has caused property/casualty loss ratios to soar. So what can those in the forest industry do about all of this? It goes without saying that insurance companies generally prefer good risks.

If you want to keep your premiums as low as possible in future years, make as few claims as possible. Manage your risks to the point where insurance claims are the exception, rather than the rule. If you are able to absorb smaller losses within your budget, ask your broker for a higher deductible. Higher deductibles may make your risk more palatable to insurers and may reduce your overall premium. Discuss coverage with your broker. In times of premium increases, it is common for consumers to sacrifice much needed coverage in favour of reduced premiums. But this can have tragic and costly results.

Deal with a broker who has access to a large number of insurance companies. Larger brokers generally have control of more premiums and are able to use that premium concentration to acquire relationships with a greater number of available insurers. Get to know your broker and communicate with them on a regular basis. A good broker will keep you informed of changes in the marketplace and will shop for the best rates and coverage for you. Check brokers out with colleagues in your industry. Find out which brokers have specific expertise and experience in the types of insurance you require.

As with any product, the more research you do the greater your likelihood of a favourable result. And in terms of your equipment, whether it’s used for harvesting or hauling timber, good housekeeping practices—unlike many stock investments these days, as we’ve all learned—do pay dividends. Keep your logging equipment clean and free of debris that could build up in the engine compartment and possibly cause a fire in the hot, dry summer months. Check your hydraulic hoses for cracks and loose fittings and make sure all electrical connections are tight and free of insulation failures.

Finally, have your fire suppression systems professionally maintained and fully charged. Logging contractors know well that solid maintenance practices and good common sense, care and attention pay off in more uptime—and could also result in insurance savings.

Wayne Kehl is regional vice-president of Barton Insurance Brokers.

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